Half-year Report
THE DIVERSE INCOME TRUST PLC
HALF-YEARLY FINANCIAL REPORT
The Directors present the Half-Yearly Financial Report of the Company for the period to 30 November 2019.
RESULTS FOR THE HALF YEAR TO 30 NOVEMBER 2019
Over the six months to 30 November 2019, the Company’s NAV rose by 0.1% This compares with the FTSE All-Share Index that went up 3.6%, the FTSE SmallCap Index (excluding Investment Companies) that went down 1.3% and the FTSE AIM All-Share Index that went down 3.9% over the same period on a capital return basis.
Increased dividends A third interim dividend of 0.90p, a final dividend of 1.10p and a special dividend of 0.16p in respect of the year ended 31 May 2019 were paid to shareholders during the half year. A first interim dividend of 0.85p for the current year was declared in October 2019 and will be paid to shareholders in February 2020. A second interim dividend of 0.90p, payable in May 2020, has also been declared.
Revenue reserves decreased to £16.8m The Company distributed £8.2m during the half-year period in dividends to shareholders, reducing revenue reserves by £0.7m. The revenue reserves are available to support dividend distributions to shareholders in future years, should incoming portfolio income prove less buoyant.
NAV total return to shareholders of 2.4% This includes the increase in NAV, plus the dividends paid during the half year and compares with an increase in the FTSE All-Share Index of 5.8% on a total return basis over the six months to 30 November 2019.
Share price total return to shareholders of 5.4% On average, the Company’s share price has traded at a 2.0% premium to the NAV over the life of the Company. During this six-month period, the share price has traded at a discount possibly due to anxiety about the political logjam and Brexit. Over the six months under review, the Company’s share price has risen faster than the NAV, as the discount narrowed.
Summary of Results
| Half year to 30 November 2019 |
Half year to 30 November 2018 |
Year ended 31 May 2019 |
|
| NAV per ordinary share | 95.23p | 94.64p | 95.17p |
| Ordinary share price (mid) | 91.60p | 93.40p | 89.00p |
| Discount to NAV1 | 3.81% | 1.31% | 6.48% |
| Revenue return per ordinary share | 1.99p | 1.89p | 3.95p |
| Ongoing charges1 | 1.11%2 | 1.17% | 1.16% |
| Ordinary shares in issue | 378,289,047 | 383,787,239 | 383,787,239 |
1 Alternative performance measure. Details provided in the Glossary below.
2 Estimated as at 30 November 2019. Ongoing charges are the Company’s annualised revenue and capitalised expenses (excluding finance costs and certain non-recurring items) expressed as a percentage of the average monthly net assets of the Company during the year.
CHAIRMAN’S STATEMENT
This Half-Yearly Report covers the period to 30 November 2019, during which mainstream markets rose a little but many small cap share prices were depressed by Brexit uncertainties.
Returns
This led to a subdued performance for your Company, which saw its NAV rise by 2.4% and share price by 5.4% over the period on a total return basis.
The FTSE All-Share Index rose 5.8% over the period, whilst the FTSE SmallCap Index (excluding Investment Trusts) rose 0.5% and the FTSE AIM All-Share Index fell by 3.2% over the period on a total return basis, despite a pickup in takeover activity.
The Company’s portfolio continued to generate underlying dividend growth. Over the half year, the revenue return per share was 1.99p, which compares with 1.89p per share in the equivalent six-month period last year.
The quarterly dividends paid by the Company continue to reflect this underlying growth, with the first interim dividend up from 0.80p last year to 0.85p. The Board has also declared a second interim dividend of 0.90p, an increase from 0.85p last year, payable on 29 May 2020 to shareholders registered at the close of business on 27 March 2020.
Total return since the Company was listed in April 2011
The Company has been listed for eight and a half years. Despite the subdued returns over the three and a half years since the Brexit referendum, the NAV of the Company has still appreciated much in line with its underlying rate of dividend growth at 8.1% per annum since issue. In addition, the dividend yield was 4.0% in the first year after issue, hence the annualised total return has been around 11.1% per annum. This compares with a total return of 6.9% per annum for the FTSE All-Share Index, 9.4% from the FTSE SmallCap Index (excluding Investment Companies) and 1.3% for the FTSE AIM All-Share Index.
Share redemptions
The Company’s share price reflects the balance of buyers and sellers on the exchange. Hence, when there is an imbalance, its share price can diverge from the Company’s NAV. The Board's policy is to minimise this risk and so, in addition to powers to buy back shares, the Company offers an annual redemption facility.
The next Redemption Point for shareholders will be at the end of May 2020, for those who submit requests during April 2020.
Board succession
We recently announced the appointment to the Board of Michelle McGrade, who brings a wealth of experience and investment knowledge. Over the last three years, we have made four new appointments in order to refresh the Board that was in place at the Company’s launch nearly nine years ago. In order to complete an orderly succession, I will retire at the next AGM.
Borrowing
In October 2019, the Company entered into a £20m unsecured revolving loan facility agreement with The Royal Bank of Scotland, replacing the previous loan facility entered into in September 2016. The facility is available for one year (with an option to request extension for a further year) and provides the scope in certain circumstances to raise the level of borrowing to £45m. The facility was undrawn as at 30 November 2019.
Strategy
The Company invests across a portfolio of both larger and smaller quoted companies with the principal objective of generating a sound and growing stream of dividend income. One of the great advantages of a multi cap approach is that it offers the Manager more opportunities to build a portfolio of holdings with greater scope for superior growth. Furthermore, there is greater scope to be risk sensitive, through diversification and minimising the need to hold stocks with significant levels of debt.
Given recent investor problems with certain open-ended funds investing in illiquid and unquoted companies, shareholders can be assured that the Company’s entire portfolio is invested in publicly listed and traded stocks that trade regularly. While some of the smaller capitalisation stocks might have less liquidity, the Board believes that they offer potential for greater returns and shareholders are protected by the closed-ended nature of our Company. The Board monitors such risks on a regular basis.
Environmental, Social and Governance (“ESGâ€)
Investing in quoted companies involves equating the potential upside, along with the potential risk of adverse outcomes. Part of this process involves evaluating how well management teams are able to minimise the risks associated with their governance, together with social and environmental issues that could cause reputational damage. It is anticipated that ESG data will have an increasing prominence in future financial and regulatory reporting. The Board will include a statement on how these issues are addressed in the Annual Report for the year ending 31 May 2020. In the meantime, it is worth noting that Premier Miton is a signatory to the United Nations Principles of Responsible Investment (“UN PRIâ€) which demonstrates the priority it places on these issues.
Prospects
In spite of moderate global economic momentum, the Company remains well placed to generate attractive returns. Following the recent UK General Election, investors will likely deploy cash built up during the Brexit uncertainty. The UK stock market has lagged many other global markets and UK valuations are attractive. If this is accompanied by an appreciation of Sterling, then domestically-focused businesses can be expected to perform well. In time, capital is likely to waterfall down to mid caps and thence into small and micro caps, many of which have been overlooked by investors in general.
The UK stock market contrasts with others in that it has a vibrant wide-ranging universe of quoted small and micro caps. In a slow-growth world, it is the Company’s multi cap strategy that is particularly well placed to deliver premium returns.
Manager
Last November, Miton Group plc merged with Premier Asset Management Group plc. The Board has been kept informed of progress of the integration, has met the new chief executive and notes the expected commercial synergies, which we will follow closely. Most importantly, our investment team and their investment approach, which have delivered excellent long-term results since launch, will remain unchanged. Further details are included in the Manager’s report below.
Michael Wrobel
Chairman
12 February 2020
MANAGER’S REPORT
Premier Miton
During November 2019, Premier and Miton merged to form Premier Miton Group plc, which remains an independent company with an emphasis on delivering premium investment returns.
Both Miton and Premier have a heritage of organically growing their fund management businesses from small beginnings, through client-centric fund strategies that have scope to deliver returns that are ahead of others. In the case of Premier, this was principally within funds including shares, bonds and property together, whereas in the case of Miton it was principally via equity portfolios in specific investment universes.
Some of the technology developed by Premier will be very helpful for Miton clients, and the reduction of overlapping costs will allow the combined group to accelerate investing in the business in order to address changing market trends ahead of others.
The day-to-day management of the Company’s portfolio continues to be carried out by Gervais Williams and Martin Turner, who have worked together on the Company since it first listed in April 2011.
Gervais Williams
Gervais joined Miton in March 2011 and is Head of Equities at Premier Miton. He has been an equity portfolio manager since 1985, including 17 years at Gartmore. He was named Fund Manager of the Year by What Investment? in 2014 and is also a board member of the Quoted Companies Alliance and a member of the AIM Advisory Council.
Martin Turner
Martin joined Miton in May 2011. Both Martin and Gervais have had a close working relationship since 2004, with their complementary expertise and skills that led them to back a series of successful companies. Martin qualified as a Chartered Accountant with Arthur Andersen, and held senior roles and gained extensive experience at Merrill Lynch and Collins Stewart.
Which stocks helped or hindered the Company’s returns over the half year?
Between the end of May and the end of November 2019, the FTSE 250 stocks (the mid-sized stocks listed on the LSE) appreciated by 9.7%, well ahead of the FTSE All-Share Index that appreciated by 3.6%. In fact, the FTSE 100 Index only rose by 2.6%, and Brexit anxiety held back interest in small caps with the FTSE SmallCap Index (excluding Investment Companies) down 1.3% and the FTSE AIM All-Share Index down 3.9%. The Company’s NAV increased by 0.1% over the six-month period with the subdued returns related to a few FTSE 250 holdings, and relatively large weightings in small caps and AIM-listed stocks. The Company’s positioning traditionally has many small cap holdings because they have delivered greater dividend growth in the past, and also superior long-term returns.
In this half year, Eddie Stobart Logistics, a major trucking business, disappointed its shareholders with an announcement that it had been overstating its profits and needed to suspend its shares while the board considered how to address the debt burden. Ultimately, three investors offered additional capital at a low share price, but only one gained the support of its bankers. Eddie Stobart was revalued down to the new equity issue price during the period and is due to be relisted shortly.
Another portfolio detractor was Amigo, which offers guarantor loans. The company scaled back the number of loans it makes available in order to meet the tighter guideline from the FCA. In spite of its relatively strong balance sheet, the holding was sold from the portfolio as its share price declined, given its poorer dividend growth prospects. However, as two high-profile open-ended investment companies were liquidated later in the period, Amigo’s share price eventually fell to even lower levels, and the Company was able to re-purchase the holding at an unusually high dividend yield.
The strongest contributor to return was Charles Taylor, which rose 51% over the period on an agreed premium takeover. The strongest share price appreciation was Blackbird, a video software business that is now gathering sales and that we expect to generate substantial cash payback in time. Since it was such a small company at the start of the period, its share price was able to rise by 176%, and in our view, to still leave it with further potential upside in future. The portfolio also invested into three financial derivative dealers, which we believe are well placed to resume growth after some more onerous FCA regulations were introduced last year. CMC, IG Group and Plus500 have collectively all contributed to returns of the Company over the half-year period.
Many small and micro cap stocks over the last three and a half years have delivered relatively disappointing returns since the Brexit referendum. Therefore, the Company finished the half year with many of these standing at what appear to be undemanding valuations, as investors fretted over the scope for the Brexit anxiety to persist if there was a hung parliament after the General Election.
How has the Company performed since listing eight and a half years ago?
One the most substantial trends over the last eight and a half year period has been that inflationary pressures have generally remained modest, in spite of monetary expansion and additional Quantitative Easing. This has led to a major reduction in bond yields. The UK Government used to pay 3.4% per year for 10-year debt when the Company was issued, and at the end of November 2019, this cost was down to just 0.7%. Despite this stimulus, global growth has been somewhat modest over this period and, if anything, has slowed over recent years.
Over this period, it has been difficult for many mainstream UK-quoted companies to generate substantial growth. Furthermore, the price earnings ratio, a measure of the valuation of the UK stock market, has also not kept up with the general increase in others, such as the US. The mainstream UK-quoted companies have offset the economic headwinds by growing their dividends, albeit that this growth has been enhanced through a reduction of dividend cover. Therefore, the capital appreciation of the FTSE All-Share Index is only 28.9% since April 2011, whereas the aggregate value of the dividends collected over that period has been 37.9%. In contrast, whilst the return on the FTSE AIM All-Share Index has been boosted by some high-profile growth companies in recent years, overall it has only risen by 0.2% since April 2011 (this is not a misprint!), and when the dividends are included, the total return is only 10.9%. The FTSE Smallcap Index (excluding investment companies) has appreciated by 68.4% over this period, and when dividends are included, the total return is 116.4%.
The Company’s NAV has risen by 95.7% over the eight and a half year period, and when dividends are included, the total return rises to 155.7%. It is worth emphasising that the major part of the capital appreciation was achieved in the years prior to the UK referendum on the EU. Over the last three and a half years, the uncertainty about the nature of the UK’s exit from the EU has led to a degree of investor anxiety, and the share prices of UK smaller quoted companies in particular have not risen as well as the rest of the UK or other mainstream stock markets. As outlined in the Chairman's Statement, it is anticipated that, as the Brexit anxieties fall away, there is scope for UK-quoted stocks to benefit from a period of catch up.
What market trends can be expected when the UK transitions out of the EU?
Three stock market changes occurred after the result of the EU referendum was first announced in June 2016.
- The UK exchange rate fell abruptly. This boosted the value of profits generated overseas and increased the Sterling profits of multinational stocks. Hence the FTSE 100 Index actually ended up rising after the Brexit vote.
- The share prices of mainstream cyclical stocks such as banks, housebuilders and retailers fell sharply on the assumption that domestic growth prospects were going to be less buoyant.
- Small cap stocks were all lumped together with domestics and their share prices were marked down sharply, rather like the cyclicals. After a few months with many small caps reporting upbeat results, their share prices staged a recovery.
Following the General Election result, there is evidence that capital allocations to the UK stock market are now rising as the uncertainty of the Brexit transition falls away. Alongside, the recent UK stock market trends are also reversing.
- The UK exchange rate has already started to appreciate, and is a headwind for multinational stocks and the FTSE 100 Index specifically. The best performing sector of the stock market has been the FTSE 250 Index stocks for now.
- Specifically, much of these renewed capital flows have been directed towards mainstream cyclicals, such as banks, housebuilders and retailers. However, in spite of the greater confidence, we do not expect the growth of the UK to greatly outpace many others.
- In time, we expect the renewed capital inflows into the UK to flow down the market capitalisation bands from the FTSE 250 stocks into small, and then microcap, stocks given that their valuations are so much lower. We expect many of the best performers to be small and micro caps where their results surprise on the upside.
Importantly, the UK is distinctive in its vibrant community of quoted small and micro caps, and there are few other markets where investors can participate in all the advantages these stocks offer.
How does the Company add value when markets are particularly volatile?
Stock markets can suffer higher periods of volatility at times, which sometimes involve larger setbacks. The Company has two strategies specifically ready to enhance shareholders return through such a period when it occurs.
A FTSE 100 Put Option
For some years, the Company has invested in a Put option. This option means the Company can sell the FTSE 100 Index at a certain level (6,300 in our case) after the stock market has sold off. This works a bit like portfolio insurance, with the value of the FTSE 100 Put option rising as the FTSE 100 falls below 6,300.
Options come with a cost – a bit like an insurance premium. Specifically, the cost of the Put option will gradually decay over the insured period (to December 2020 in our case), irrespective of whether the markets suffer any fluctuations or not. It is therefore important to minimise the initial cash cost of a Put option, since its resale value generally falls over time (assuming markets are relatively flat) and ultimately becomes worthless if the FTSE 100 Index does not fall significantly below 6,300.
With this in mind, we tend to wait for buoyant periods in the market before purchasing Put options. In addition, we have been cautious about the scale of the Put options purchased. Therefore, the Put option only covers severe market setbacks (in our case when the FTSE 100 Index falls below 6,300) and only covers one quarter of the Company’s total assets. This means that the cost of the option is normally around 1.0% of the NAV per year on average, were the option to expire worthless at the end of its term.
The key advantage of having Put options in the portfolio is that their resale value would be expected to rise in relation to a market sell-off. The full level of that appreciation would be related to the duration of the remaining term of the option as well as the scale of the market setback. If the Put option were to be sold when markets were low, then the cash proceeds could be used to purchase additional equities for the portfolio at a time when their share prices were depressed. The added holdings in the portfolio would then enhance its recovery potential thereafter. Alongside this, the Company would benefit from the extra income from the new holdings added during this period.
In summary, the Put option strategy puts Diverse in a position where it has scope to take advantage of any major market setback, at a relatively modest running cost, if markets do not drop back significantly in the period prior to December 2020.
The Company’s Debt Facility
Generally, as outlined above, we believe the Company has plenty of scope to generate an attractive long-term return without relying on debt. Therefore, it generally does not use borrowing. However, the Company has an unused debt facility ready so it can purchase additional cheap shares and hold them were markets really well placed to recover after a severe setback.
Overall, the Company’s strategy necessarily involves taking stock market risk, which could involve a significant NAV drawdown in the future. At present, the drawdown risk is being offset in part by holding a FTSE 100 Put option since this would rise in value if the mainstream stock market fell sharply before December 2020. If the stock market were to bottom, the Company would have access to a pre-agreed debt facility and would be able to purchase extra holdings and participate in greater scale in the recovery. Together, we believe these strategies put the Company in a position to take some advantage of a significant stock market setback and subsequent recovery, which would enhance the returns of the Company’s NAV over such a period.
What are the prospects for the Company?
Since 2008, a key driver of global growth has been Chinese infrastructure investment. Our collective problem is that after a decade of Chinese infrastructure spend, many of their current projects do not generate enough cash to fund the repayment of their debt. Therefore, the Chinese have found it harder to borrow over recent years, and this has led to a marked slowdown in Chinese growth, and that of the world economy.
As larger companies rarely grow much faster than their host economies, the slowdown in world growth suggests that most mainstream companies will not grow much in future. It also implies stock market returns could turn out to be quite modest. Indeed, the fact that government debt is now standing on ultra-low interest rates also implies that returns on most asset classes are likely to be very modest in future.
Diverse was set up with these challenges in mind. The wide-ranging nature of the multi cap strategy means that the portfolio can pick more of the quoted companies that are able to sustain dividend growth even when the wider economy is not growing. During globalisation and the years of plentiful growth, this differential has not been particularly relevant. However, now that globalisation has evolved into nationalism and global growth has died away, small caps could be important. We would argue that this is the moment when all investors will become more interested in diversifying risk and including more companies with scope to buck the wider economic constraints.
Overall, during the long period of Brexit uncertainty, the valuation of the UK stock market has fallen behind others. Small and micro caps are even more overlooked than mainstream stocks, so we believe that they have potential for an even greater performance catch-up in future. In summary, this process of catch-up has already begun, and hence we are very upbeat about the Company’s prospects over both the short and the longer term.
Gervais Williams and Martin Turner
12 February 2020
PORTFOLIO INFORMATION
as at 30 November 2019
Rank |
Company |
Sector & main activity |
Valuation £’000 |
% of net assets |
Yield1 % |
| 1 | Charles Taylor | Industrials | 8,942 | 2.5 | 3.4 |
| 2 | Randall & Quilter2 | Financials | 6,443 | 1.8 | 5.03 |
| 3 | Legal & General | Financials | 5,594 | 1.5 | 6.0 |
| 4 | Diversified Gas & Oil2 | Oil & Gas | 5,507 | 1.5 | 10.4 |
| 5 | Strix2 | Industrials | 5,396 | 1.5 | 4.0 |
| 6 | 4lmprint | Consumer Services | 5,321 | 1.5 | 1.9 |
| 7 | Jadestone Energy2 | Oil & Gas | 5,159 | 1.4 | - |
| 8 | Lloyds Banking | Financials | 4,667 | 1.3 | 5.3 |
| 9 | CMC Markets | Financials | 4,628 | 1.3 | 2.4 |
| 10 | IG | Financials | 4,533 | 1.3 | 6.4 |
| Top 10 investments | 56,190 | 15.6 | |||
| 11 | Highlands Gold Mining2 | Basic Materials | 4,530 | 1.3 | 6.8 |
| 12 | Paypoint | Industrials | 4,301 | 1.3 | 6.5 |
| 13 | Kenmare Resources | Basic Materials | 4,281 | 1.2 | 0.9 |
| 14 | Sabre Insurance | Financials | 4,181 | 1.2 | 3.9 |
| 15 | Norcros | Industrials | 4,117 | 1.1 | 3.5 |
| 16 | Manolete Partners2 | Financials | 4,110 | 1.1 | 0.5 |
| 17 | Tesco | Consumer Services | 4,099 | 1.1 | 2.9 |
| 18 | Rank | Consumer Services | 4,089 | 1.1 | 3.1 |
| 19 | Hilton Food | Consumer Goods | 4,068 | 1.1 | 2.2 |
| 20 | Aviva | Financials | 4,033 | 1.1 | 7.5 |
| Top 20 investments | 97,999 | 27.2 | |||
| 21 | Royal Bank of Scotland | Financials | 4,027 | 1.1 | 7.7 |
| 22 | Centamin | Basic Materials | 3,989 | 1.1 | 4.9 |
| 23 | National Grid | Utilities | 3,987 | 1.1 | 5.4 |
| 24 | Hostelworld | Consumer Services | 3,986 | 1.1 | 8.5 |
| 25 | 888 | Consumer Services | 3,949 | 1.1 | 4.3 |
| 26 | Morrison (WM) Supermarkets | Consumer Services | 3,882 | 1.1 | 4.4 |
| 27 | Smith (DS) | Industrials | 3,837 | 1.1 | 4.2 |
| 28 | Morses Club2 | Financials | 3,783 | 1.1 | 6.2 |
| 29 | Go-Ahead | Consumer Services | 3,767 | 1.1 | 4.7 |
| 30 | Lenergizer2 | Industrials | 3,744 | 1.0 | 6.0 |
| Top 30 investments | 136,950 | 38.1 | |||
| 31 | Lancashire | Financials | 3,738 | 1.0 | 1.6 |
| 32 | Admiral | Financials | 3,737 | 1.0 | 6.0 |
| 33 | Inspired Energy2 | Industrials | 3,715 | 1.0 | 4.0 |
| 34 | Stobart | Industrials | 3,658 | 1.0 | 2.7 |
| 35 | Savannah Petroleum2 | Oil & Gas | 3,608 | 1.0 | - |
| 36 | Redde2 | Financials | 3,596 | 1.0 | 10.5 |
| 37 | Zotefoams | Basic Materials | 3,593 | 1.0 | 1.4 |
| 38 | Smurfit Kappa | Industrials | 3,578 | 1.0 | 3.1 |
| 39 | Mondi | Basic Materials | 3,563 | 1.0 | 4.2 |
| 40 | Photo-Me Inernational | Consumer Goods | 3,506 | 1.0 | 9.6 |
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