Information  X 
Enter a valid email address

Diverse Inc Trust (DIVI)

  Print   

Tuesday 18 August, 2020

Diverse Inc Trust

Annual Financial Report

THE DIVERSE INCOME TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MAY 2020

The Directors present the Annual Financial Report of The Diverse Income Trust plc (the “Company” or “Diverse” or the “Trust”) for the year ended 31 May 2020. The full Annual Report and Accounts can be accessed via the Company’s website, www.mitongroup.com/dit, or by contacting the Company Secretary on 01392 477500.

STRATEGIC REPORT

RESULTS FOR THE YEAR TO 31 MAY 2020

  • Over the year to 31 May 2020, the movement in the Company’s NAV was -6.63% This compares with the FTSE All-Share Index that fell 11.2%, the FTSE SmallCap Index (excluding Investment Companies) that fell 17.1% and the FTSE AIM All-Share Index that fell 7.7% over the same period on a capital return basis.
  • 3.70p of ordinary dividends for the year The three interim dividends and the proposed final dividend for the year amount to 3.70p, compared with 3.65p in the previous year, an increase of 1.4%. The Company has not recommended a special dividend this year (2019: 0.16p).
  • Revenue reserves decreased to £15.0m The Company distributed £14.8m during the year in dividends to shareholders whilst drawing £2.5m from revenue reserves. The revenue reserves are available to help smooth dividend distributions to shareholders.
  • NAV total return to shareholders of -2.5% This includes the decrease in NAV, plus the dividends paid during the year and compares with a decrease in the FTSE All-Share Index of 11.2% on a total return basis over the year to 31 May 2020.
  • Share price total return to shareholders of -1.2% The share price of the Company fell back further than the NAV reduction over the year, so the share price total return, which includes the share price setback offset by the dividends declared, was more adverse than the NAV total return.
31 May 2020  31 May 2019  Change 
NAV per ordinary share 88.82p  95.17p  (6.7)%
Ordinary share price (mid) 84.00p  89.00p  (5.6)%
Discount to NAV* 5.43% 6.48% 
Revenue return per ordinary share 3.27p  3.95p 
Ordinary dividends per ordinary share paid/declared 3.70p  3.65p  1.4%
Special dividend per ordinary share declared 0.16p 
Total dividends per ordinary share paid/declared 3.70p  3.81p 
Ongoing charges (further details below) 1.09% 1.16%
Ordinary shares in issue 378,289,047  383,787,239 

* Alternative performance measure. Details provided in the Glossary below.

CHAIRMAN’S STATEMENT

“A modest increase in full year dividend is in keeping with our objective to pay an attractive and growing dividend.”

Michael Wrobel

Chairman

This annual report covers the 12 months to 31 May 2020.

Annual returns

Although stock markets rose for much of the Trust’s financial year, the outbreak of the global pandemic during February and March 2020 led to a major setback. Lockdowns around the globe have created unemployment and reduced output. The resulting global recession has also put pressure on the finances of many companies. Over the year under review, the total return for the FTSE All-Share Index was -11.2%, the FTSE Small Cap Index (excluding Investment Trusts) ?17.1%, and the FTSE AIM All-Share Index -7.7%.

In contrast, the total return on the Diverse Income Trust was -2.5%. The Trust proved more resilient given our focus on companies with robust balance sheets and less sensitivity to economic activity. Furthermore, for several years we have held a FTSE 100 Put option as insurance against a market fall, so when the UK stock market fell back in March 2020 this rose in value and was cashed in. This provided an additional £20m of new cash that was available to invest in additional portfolio holdings at a time when share prices were particularly low.

Shareholders’ dividends

The Trust’s revenue per share from the portfolio fell from 3.95p to 3.27p this year, since during our final quarter, numerous companies reduced or cancelled their dividends in response to the pandemic.

The Board is recommending a final dividend of 1.05p, so that the four quarterly dividends for the full year would amount to 3.70p, which compares with 3.65p last year. This modest increase is in keeping with our objective to pay an attractive and growing dividend. The Board proposes to utilise part of the Company’s revenue reserves, built up from surpluses retained in previous years, in order to meet the revenue shortfall. If required, it is our intention to maintain this dividend policy by utilising revenue reserves since these are held in order to alleviate such circumstances. No special dividend has been declared this year, which compares with a 0.16p special paid last year.

COVID-19 Pandemic

The impact on personal lives, the economy, share prices and general corporate dividends are evident and still present. Our Managers and third party service providers have been able to manage their businesses thanks to technology and hard efforts, so that our Company has continued to operate effectively.

Returns since the Trust was first listed in April 2011

Starting with a yield at launch of 4.0%, the Company’s long-term objective is to deliver growth in the Trust’s revenue, which in turn should drive capital appreciation. Over the nine years and one month that the Trust has been listed, its revenue per share has grown by 5.4% and the NAV has appreciated by 6.6% per annum. The total return on the Trust since issue is 10.4% per annum, which compares with 4.5% from the FTSE All-Share Index, 6.8% from the FTSE SmallCap Index (excluding Investment Trusts) and 0.6% from the FTSE AIM All-Share Index over the same period.

Share Redemptions

The Trust’s share price reflects the balance of buyers and sellers on the stock exchange. Hence when there is an imbalance, the share price can diverge from the underlying NAV. In order to ensure that any imbalances do not persist, the Trust offers all shareholders the option to redeem their shares each year.

In April 2020, 20,243,942 shares were offered for redemption, which represented around 5.3% of the share capital. At the Redemption Point on 29 May 2020, a day before the Trust’s year end, the Board resolved to redeem these shares for cash at the prevailing NAV per share, with effect from 12 June 2020.

At the AGM the Company is seeking shareholder approval for the renewal of the authority to buy-back shares, and the Board is prepared to do so if it determines this to be in the best long-term interests of shareholders.

Board refreshment

I retire from the Board after this year’s AGM, having served the appropriate term since the Company’s launch. The Board has conducted a thorough review to complete our succession plans and ensure a smooth transition. I am delighted that Andrew Bell will take over as Chair. He brings a wealth of investment trust experience. Calum Thomson will take on the role as the Senior Independent Director. As a shareholder, I am confident that the Company is in good hands, with a refreshed and capable Board and an excellent team of portfolio managers at Premier Miton, ably led by Gervais and Martin.

Prospects

The broad investment universe of the Trust’s equity income strategy should be a major advantage at a time when the dividend prospects for the UK market’s larger companies may be very limited. We believe that our Manager’s approach to selecting stocks with strong finances and sound prospects for dividend growth continues to offer advantages to long-term investors.

Michael Wrobel

Chairman

17 August 2020

MANAGER’S REPORT

Investing in quoted companies always involves actively contemplating areas where investment returns could be affected by an abrupt change in economic circumstances and social attitudes. Three of these potentially controversial areas are outlined below, along with an explanation of how the Trust’s strategy addresses each.

The heavily indebted nature of global economies

Whilst stock markets have delivered very substantial returns over recent decades, much of their momentum may have been driven by two factors that have led to near-continuous growth of credit.

  • The ongoing surge of low-cost imports has kept inflation in check for three decades. Whilst home-rental costs and other domestic charges have risen, they have been offset by the falling prices of clothing, electronics and food. Overall, CPI inflation has remained benign for a generation, and central banks have hardly ever needed to raise interest rates.
  • Without the constraint of CPI inflation, central banks have been able to inject economic stimuli at will. After UK interest rates fell below 1.0%, the prior trend was kept going by the use and reuse of Quantitative Easing over the past 12 years.

With such a favourable economic background, the commercial banking sector has been ever ready to lend. Corporates, governments and consumers have come to treat the near-continuous supply of low-cost credit as normal and worked on the basis that debt could be constantly deferred, rather than repaid. Following the global pandemic, governments have stretched even further to help businesses avoid collapse. Whilst this has kept the status quo in place for now, the highly indebted nature of global economies does limit the scope for central banks and governments to address future crises. The Trust’s portfolio is generally made up of quoted holdings with modest debt or net cash, which will have greater resilience when the debt equilibrium comes to an end.

Directors’ remuneration

One of the side effects of the long period of rising stock markets is that quoted companies have leap-frogged each other in an attempt to recruit the best executives. For some years, directors’ remuneration has appeared out of line with the commercial value that they deliver - most particularly within FTSE 100 boards. Executive remuneration packages will moderate when stock market returns normalise, but in the meantime, the Trust routinely votes against the remuneration reports of the largest quoted companies.

The Manager also actively engages with the Remuneration Committees of the companies in the Trust’s portfolio, and advocates that the stock market metrics of the performance criteria are too narrow. Staff motivation, customer service and sustainability could all have much larger weightings in directors’ long-term remuneration for example.

Addressing climate change and reducing carbon footprints

As part of the process of identifying downside risks, the Manager questions management teams on their plans to address climate change within their businesses, with an objective of working with the management teams towards improving their carbon footprints over time.

It is anticipated that all quoted companies will become obliged to collect data on their annual carbon emissions and publish these with their annual results. Already, a number of UK-quoted companies publish standardised metrics such as the CO2 emissions per unit of production or £1m of revenue, along with their overall water and energy consumption per annum. As this becomes the norm, we expect UK-quoted companies to work towards progressively reducing their carbon footprint going forward.

Although the Trust does have a policy of investing across most industry sectors, one of the factors that the Manager takes into account is the risk that some industry sectors may become so unpopular that gradually all other institutional investors will avoid them altogether. If this occurs, then there is a danger that the Trust will be unable to liquidate a holding. The Trust has already scaled back its holdings related to coal extraction companies for this reason.

Conversely, there are quite a few UK-quoted businesses working in sectors that have a positive impact on carbon emission targets. Inspired Energy, which monitors the power and water consumption of their customers, to help them reduce wastage is one example. Over recent years, Inspired Energy have extended their service so that they can provide auditable data on the annual carbon emissions of their clients. At present, the valuations of many of these kinds of companies are often no higher than others in the portfolio, because numerous smaller quoted companies are overlooked by other investors. In time however, we do expect the valuations of stocks that are making a positive impact on the climate change agenda to move to premium valuations. As this occurs, it is expected that it will enhance the returns of the Trust.

Who are the fund managers of the Trust?

Premier Miton Group plc is the fund manager of the Trust. They are a listed fund management company with a high profile for successfully managing UK-quoted smaller company portfolios over the longer term.

Prior to the merger of Miton and Premier last November, both companies had 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, it was principally within funds with a mix of shares, bonds and property, whereas in the case of Miton, it was principally via equity portfolios in specific investment universes, such as The Diverse Income Trust plc. Premier Miton are a signatory to the UN Principals of Responsible Investing.

The day-to-day management of the Trust’s portfolio continues to be carried out by Gervais Williams and Martin Turner, who came together as a team when this Trust first listed in April 2011.

Gervais Williams

Gervais joined Miton in March 2011 and is Head of Equities in Premier Miton. He has been an equity fund manager since 1985, including 17 years at Gartmore. He was named Fund Manager of the Year by What Investment? in 2014. Gervais 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 that led them to back a series of successful companies. Martin qualified as a Chartered Accountant with Arthur Anderson and had senior roles and extensive experience at Merrill Lynch and Collins Stewart.

Why did the UK stock market fluctuate so much over the year?

Prior to the start of the year under review in May 2019, the US central bank had been attempting to

normalise US interest rates, after a long period at very low levels. They had raised US interest rates by 0.25% several times and inverted their policy of Quantitative Easing into QT – Quantitative Tightening. As global growth became very weak however, and stock markets around the world fell back, the policy was abandoned. Hence, at the start of the Trust’s year in June 2019, stock market indices around the world were already recovering well.

This positive trend was less evident in UK stocks where political uncertainty led to a logjam over Brexit implementation. This anxiety was most evident within smaller UK-quoted company share prices, as investors chose to hold back any additional investment at the time.

In December 2020, the political uncertainty cleared, when the Conservative party won a clear parliamentary majority in a General Election. This brought immediate interest into the UK stock market, most particularly into smaller UK-quoted companies.

Towards the end of the Trust’s financial year, the improving trend was eclipsed however, by the spectre of the global pandemic. As COVID-19 spread around the world, most governments were obliged to introduce lockdowns, to ensure that their health services weren’t overwhelmed. Unfortunately, this has initiated a deep global recession, and a major drawdown of global stock markets.

Governments have sought to bridge the most adverse economic effects of the recession, by offering extra payments to businesses in the hope of preventing as many job losses as possible. Whilst these policies were welcomed by the financial markets, the UK stock market still finished the Trust’s year well down.

The total return on the FTSE All-Share Index over the year to May 2020, including the decline in the stock market offset in part by the dividend income was -11.2%. The total return on the FTSE AIM All-Share Index was down 7.7%, and the FTSE SmallCap Index (excluding Investment Companies) was down 17.1%.

Why were the Trust’s returns relatively resilient this year?

Diverse has an actively managed strategy that aims to generate better dividend growth than others

over the longer term, with an eye to moderating downside risk where possible. Three components of this risk mitigation strategy came together this year, which helped to scale back the Trust’s NAV decline.

First, the bulk of the stocks in the portfolio have been selected for resilience, such as those with relatively strong balance sheets or counter-cyclical business models. During economic setbacks, counter-cyclical holdings can sometimes continue to prosper. This year, the gold mining holdings, such as Centamin and Highland Gold for example, boosted the Trust’s return by 1.8%. Alongside, the holdings in spread betting businesses, including CMC Markets, IG Group and Plus500, also enhanced the Trust’s return by 1.9% this year.

Second, many of the small cap portfolio holdings have been on overlooked valuations relative to their prospects. With the political uncertainty during 2018 and 2019, many small cap valuations were even more overlooked than usual. When small cap stocks stand on such undemanding valuations they are vulnerable to being taken over for cash at a significant premium, and this year the Trust’s portfolio has lost more than usual to a stream of cash takeovers. During the year, the three takeovers that boosted the Trust’s returns the most were of Charles Taylor, Haynes Publishing and KCOM which together enhanced the Trust’s return by 1.6%.

Third, the Trust’s longer-term strategy has such good prospects that it can sometimes afford an investment in a FTSE 100 Index Put option, despite the likelihood that it often might end up modestly detracting from portfolio returns. Normally, such a holding would only generate a profit when the mainstream stock market suffers a major setback, and these events occur infrequently. The year under review was one of those infrequent years and the Put option rose in value to a multiple of its original cost, when it was sold during March 2020. The appreciation of the Put option offset a part of the drawdown of the portfolio valuation at the time, whilst the funds released on its sale were able to fund new investment holdings at a time when their purchase prices were relatively low and boost the Trust’s revenues with the forthcoming dividends they pay.

The three factors outlined above were offset in part by some individual portfolio holdings that disappointed over the year. Many of the poor outcomes this year were amongst the lending institutions in the portfolio. The Trust’s holdings in Lloyds and The Royal Bank of Scotland for example passed their dividends during March and April 2020, and their share price setbacks detracted 1.2% over the year. Furthermore, Amigo and Morses Club had individual specific disappointments, cut their dividends and together detracted 2.5% over the year. Given their limited dividend prospects, most of these holdings have now been sold, with the exception of Morses Club which is expected to resume dividend payouts before long.

After numerous dividend cuts across the stock market, what is the outlook for the Trust’s payout?

In general, corporates have borrowed additional cash easily for years. During this period, even when individual companies did run short of internal cashflow to pay their dividends, it was often easy to maintain dividend payments by taking on additional debt.

Many businesses will now become less profitable, or even loss-making with the pandemic, and the global recession. Whilst this is a challenge for many, it is particularly difficult for companies with major debt balances. Lesser profitability implies lesser internal cashflow, so it may become even harder to sustain dividend payments, with some falling foul of loan covenant ratios as well. Given the potential severity of the global recession, numerous quoted companies have chosen to pass their dividends and retain the cash in their businesses.

As the Trust starts a new financial year, the prospects for dividend income are already improving taking into account the payment of dividends that had been deferred and the reinstatement of dividends from companies that had previously cancelled.

The sale of the Put option generated an extra £20m of cash for the Trust, that was available to be invested in new income generating stocks. In addition, the share prices of certain holdings in the Trust’s portfolio have risen so as these are sold and replaced with higher dividend paying holdings, this tends to boost the Trust’s revenue. In time, we also expect some of the companies that passed their dividends to resume again. Overall, the Trust’s dividend revenue has already started to recover, and in time it is anticipated that it will exceed the current annual dividend of 3.70p per share. When it does, the Trust will be in a position to increase dividends to shareholders as it did previously without drawing on reserves.

How has the Trust performed since it was first set up in April 2011?

The FTSE All-Share Index has hardly appreciated at all between the end of April 2011 when the Trust was first listed and the end of May 2020, the end of the Trust’s financial year. When the dividends from the FTSE All-Share Index are included however, the cumulative total return has been 48.6%.

Whilst the FTSE AIM All-Share Index has performed well over recent years, its returns were relatively weak earlier, so its total return over the same time period was 5.7%. In contrast, the FTSE SmallCap Index (excluding Investment Companies) has delivered a total return over 78.5% over this time period. The average of all UK equity income trusts was 67.8% over this period.

The Trust has outperformed these comparatives with a NAV total return of 145.6% when all the dividends paid to shareholders are included.

Does the Trust invest in unlisted stocks?

No, the Trust invests solely in quoted stocks albeit this does include some warrants that have been free issued with new shares and some loan notes convertible into ordinary shares. We have always anticipated that the longer-term returns on the Trust’s strategy would be entirely satisfactory without the need to invest in unlisted stocks.

What are the longer - term prospects for the Trust?

Stock markets have been persistently strong over past decades because corporates, governments and consumers have all been comfortable taking on progressively more borrowings. This positive trend has been facilitated by two factors.

  1. The ongoing surge of low-cost imports has kept inflation in check for three decades. Whilst rental costs and other domestic charges have inflated, they have been offset by the falling prices of clothing, electronics and food. Overall, CPI inflation has remained benign and central banks haven’t needed to raise interest rates meaningfully for a generation.

2. Without a CPI inflation constraint, central banks have been able to inject economic stimulus at will. When UK interest rates fell below 1.0%, the use and reuse of QE over the past 12 years has kept the prior trend going.

The key outcome has been a long period when commercial banks have been in near-permanent lending mode. Alongside, as the cost of debt has tended to decline, borrowers have lived in a world where credit has been ever plentiful and cheap.

All this has been reflected in a long-standing economic equilibrium. Whenever debt became due, there was always someone willing to relend the cash, often at a lower interest rate than last time. Borrowers came to treat easy access to debt as normal and use it as a bridge in expectation of bigger returns in future. Quoted companies that weren’t generating as much surplus cashflow as they hoped for example, could keep their dividends growing via extra cheap debt in the expectation that their profits would catch up in time. In turn, the sustained use of economic stimulus boosted the demand for risk assets as well, with bond yields falling to ultra-low levels, and stock markets rising considerably. Easy access to plentiful risk capital engendered profligate corporate behaviour. Heavily cash consumptive growth stocks could forgo profits for multiple years for example, because they could rely on abundant risk capital chasing the mega-payback in future.

The key question about the future is whether the long-standing debt equilibrium can be maintained through a pandemic? In our view, it all boils down to whether banks will continue to offer plentiful debt at low interest rates.

  • At present, the default risk for banks has been deferred as governments have made up for the corporate cashflow shortfall, in the hope that everything remains in place once the pandemic is over. Many market participants look forward to the lockdowns being unwound once the virus is under control and it is anticipated that we can do the same.
  • In contrast, there is evidence that COVID-19 hotspots will continue to flare up, which could  lead to numerous consumer and entertainment businesses becoming insolvent. Unemployment has already risen considerably globally and this trend, along with an increase in debt defaults, might lead banks to change their behaviour.

The prospect of an end to the past status quo is a real worry for politicians and central bankers who fear they may be losing the initiative. Already quoted companies have been quick to cut back their dividends as they retain as much corporate cashflow as they can ahead of the global recession.

In our view, the prognosis is a new stock market trend where corporates scale back their debt, and that could lead to a flat line for years, in a similar way to that of the Japanese stock market for example.

If this were to occur, it will become essential for stock market investors to select quoted companies that have the potential to buck the wider trend. During the 1970s, when stock market conditions were equally demanding, UK smaller quoted companies went on to outperform by a wide margin.

One of the major advantages of being listed is the access to external capital at a time when it is scarce for others. During the coming period, there will be the opportunity to acquire what were overindebted but otherwise viable businesses from the receiver, or distressed sellers, at unusually low valuations. These have the potential to provide very high cash paybacks on their unusually low acquisition prices. Transactions like this may not only boost the acquirer’s cashflow but also put them in a position to deliver superior dividend growth at a time when many of the mainstream dividend payers are compromised. The key point is that these kinds of transactions could be helpful for some mainstream stocks, but often being small, they normally would only be incremental. The same transaction within a UK-quoted small cap could be transformational to its prospects and its share price.

Overall, we believe that a multicap equity income strategy that can pick out those with the best opportunities remains well-placed to better navigate these uncertain markets.

Gervais Williams and Martin Turner

17 August 2020

PORTFOLIO INFORMATION

AS AT 31 MAY 2020

Rank Company Sector & main
activity
Valuation
£000
% of net
assets
Yield¹
1 Highland Gold Mining2 Basic Materials 7,569 2.3 5.2
2 Centamin Basic Materials 7,334 2.2 3.8
3 Diversified Gas & Oil2 Oil & Gas 6,594 2.0 10.6
4 CMC Markets Financials 6,432 1.9 1.8
5 Admiral Financials 5,650 1.7 4.2
6 IG Financials 5,543 1.6 5.7
7 Morrison (WM) Supermarkets Consumer Services 5,495 1.6 3.6
8 Strix2 Industrials 5,274 1.6 4.1
9 FRP Advisory2 Professional Services 5,193 1.5 -
10 Hilton Food Consumer Goods 5,192 1.5 1.7
Top 10 investments 60,276 17.9
11 Concurrent Technologies2 Technology 4,807 1.4 2.3
12 Manolete Partners2 Financials 4,764 1.4 0.2
13 Amino Technologies2 Technology 4,740 1.4 1.2
14 Kenmare Resources Basic Materials 4,660 1.4 3.0
15 Paypoint Industrials 4,618 1.4 7.7
16 Direct Line Insurance Financials 4,509 1.3 2.7
17 Randall & Quilter2 Financials 4,474 1.3 5.8
18 Tesco Consumer Services 4,367 1.3 4.0
19 Phoenix Financials 4,235 1.3 7.6
20 Avacta2 Health Care 4,212 1.3 -
Top 20 investments 105,662 31.4
21 Legal & General Financials 4,207 1.3 8.9
22 National Grid Utilities 4,150 1.2 5.0
23 Polymetal International Basic Materials 4,007 1.2 3.8
24 Rio Tinto Basic Materials 3,911 1.2 5.4
25 Vodafone Telecommunications 3,868 1.2 6.0
26 Sabre Insurance Financials 3,786 1.1 4.8
27 Plus500 Financials 3,718 1.1 3.9
28 Inspired Energy2 Industrials 3,605 1.1 4.1
29 BHP Basic Materials 3,467 1.0 7.1
30 Smurfit Kappa Industrials 3,457 1.0 0.9
Top 30 investments 143,838 42.8
31 St James’s Place Financials 3,435 1.0 2.2
32 Jersey Electricity Utilities 3,359 1.0 3.4
33 Intermediate Capital Financials 3,339 1.0 4.0
34 Jadestone Energy2 Oil & Gas 3,323 1.0 -
35 Begbies Traynor2 Industrials 3,211 1.0 2.8
36 Mondi Basic Materials 3,207 1.0 1.8
37 Sainsbury (J) Consumer Services 3,199 1.0 1.7
38 888 Consumer Services 3,184 0.9 3.1
39 Hastings Financials 3,183 0.9 5.4
40 GlaxoSmithKline Health Care 3,168 0.9 4.8
Top 40 investments 176,446 52.5
Balance held in 85 equity investments 129,564 38.6
Total equity investments 306,010 91.1
600 Group 8% Convertible Loan Notes 14/02/20223 2,005 0.6
Intercede Group 8% Secured Convertible Loan Notes 29/12/20214 1,550 0.5
Active Energy 8% Loan Notes 20224 833 0.2
Fixed interest investments 4,388 1.3
Total investment portfolio 310,398 92.4
Other net current assets 25,612 7.6
Net assets 336,010 100.0

1 Source: Thomson Reuters. Dividend yield based upon historic dividends and therefore not representative of future yield and includes special dividends where known.

2 AIM/NEX listed.

3 Bermuda Stock Exchange Listed.

4 TISE listed.

A copy of the full portfolio of investments as at 31 May 2020 is available on the Company’s website, www.mitongroup.com/dit.

Portfolio exposure by sector £310.4 million
%
Financials 33.2
Basic Materials 14.8
Industrials 13.2
Consumer Services 9.1
Oil & Gas 7.9
Technology 6.1
Consumer Goods 5.4
Health Care 4.7
Utilities 2.4
Telecomms 1.8
Cash and Fixed interest 1.4
100.0

   

Actual income by sector £14.0 million
%
Financials 37.8
Industrials 13.3
Consumer Services 10.5
Basic Materials 10.4
Oil & Gas 9.9
Consumer Goods 8.7
Technology 3.7
Utilities 2.0
Health Care 1.3
Cash and Fixed Interest 1.3
Telecomms 1.1
100.0

   

Portfolio by asset allocation £310.4 million
%
AIM/NEX Exchanges 35.6
FTSE 100 Index 26.7
FTSE 250 Index 15.3
FTSE SmallCap Index 11.7
Other 5.6
International Equities 1.9
FTSE Fledging Index 1.8
Cash and Fixed Interest 1.4
100.0

   

Portfolio by spread of investment income £14.0 million
%
FTSE 100 Index 32.7
AIM/NEX Exchanges 25.9
FTSE 250 Index 17.1
FTSE SmallCap Index 13.4
Other 3.8
Cash and Fixed Interest 3.7
FTSE Fledging Index 1.9
International Equities 1.5
100.0

Source: Thomson Reuters.

The LSE assigns all UK-quoted companies to an industrial sector and frequently to a stock market index. The LSE also assigns industrial sectors to many international quoted equities as well, and those that have not been classified by the LSE have been assigned as though they had. The portfolio as at 31 May 2020 is set out in some detail above, in line with that included in the Balance Sheet. The income from investments above comprises all of the income from the portfolio as included in the Income Statement for the year. The AIM and NEX markets are both UK exchanges specifically set up to meet the requirements of smaller listed companies.

The first two tables above determine the overall sector weightings of the Company’s capital at the end of the year and with regard to the income received by the Company over the year. The second pair of tables determines the LSE stock market index within which portfolio companies sit and the indices that derive the income received by the Company over the year.

Investments for the Company’s portfolio are principally selected on their individual merits. As the portfolio evolves, the Manager continuously reviews the portfolio’s overall sector and index balance to ensure that it remains in line with the underlying conviction of the Manager. The Investment Policy is set out below and details regarding risk diversification and other policies are set out below.

A Summary of the Total Costs Involved in Managing Diverse

Investment trusts differ from some other forms of collective funds in that they are set up as independent corporations with their operations overseen by a board that is separate from and independent of the fund management group that manages the capital. In addition, they are listed, with their shares traded on an approved exchange – which, in our case, is the LSE.

Running costs are deducted from the total assets of the Company on a pro-forma basis so the NAV published each day is expressed after costs. The figures below are the costs paid by the Company over the year under review and are expressed as a percentage of the average asset value of the Company over the year to 31 May 2020 of £346,694,000 (year to 31 May 2019: £374,922,000).

2020 2019
% %
Fund management fees1 0.86 0.96
Administration costs, including Company Secretarial fees 0.04 0.03
Directors/Auditor/Depositary/Registrar/Custodian and Stockbroker fees 0.12 0.11
All other direct costs, including VAT on the fees above, plus marketing, legal, printing, insurance and bank charges 0.07 0.06

Ongoing charges

1.09

1.16

In addition, the Company also pays transaction charges that are levied when shares are bought or sold in the portfolio. These are dealing commissions paid to stockbrokers and stamp duty, a Government tax paid on transactions (which is zero when dealing on the AIM/NEX exchanges).

2020 2019
% %
Costs paid in dealing commissions 0.05 0.05
Stamp duty, a Government tax on transactions 0.14 0.08
Overall costs including charges on transactions2 1.28 1.29

The overall costs of the Company for the period were 1.28%. Despite a loss during the year, this compares with the Company’s average NAV total return since issue of 10.38% per annum (after the deduction of costs).

1 Fund management fees are tiered and calculated based on the share price, so may vary in each year. With effect from 1 August 2019, the Manager receive d a management fee of 0.9% per annum on the adjusted market capitalisation of the Company up to £300m, 0.8% per annum on the average market capitalisation between £300m and £ 5 00m and 0.7% per annum on the average market capitalisation above £ 5 00m .

2 Transactions conducted by the Company also involve some loss of value due to the dealing spread in stock exchange prices. Spreads range from less than 1% in the most actively traded large cap stocks to more than 3% in the smallest, most infrequently traded stocks. The exact loss of value is difficult to determine precisely, but is normally less than half of the dealing spread at the time of the transaction. In a large percentage of the transactions, especially in the smallest stocks, the stock is passed through from sizeable seller to sizeable buyer on a ‘put through’ basis with potentially no loss of value through the spread. During the year under review, this cost is believed to be very modest in comparison to the NAV.

Investment Objective

The Company’s investment objective is to provide shareholders with an attractive and growing level of dividends coupled with capital growth over the long term.

Investment Policy

The Company invests primarily in UK-quoted or traded companies with a wide range of market capitalisations, but a long-term bias toward small and mid cap equities. The Company may also invest in large cap companies, including FTSE 100 constituents, where it is believed that this may increase shareholder value.

The Manager adopts a stock specific approach in managing the Company’s portfolio and therefore sector weightings are of secondary consideration. As a result of this approach, the Company’s portfolio does not track any benchmark index.

The Company may utilise derivative instruments including index-linked notes, contracts for differences, covered options and other equity-related derivative instruments for efficient portfolio management, gearing and investment purposes. Any use of derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Company’s direct investments, as described below. The Company will not enter into uncovered short positions.

Risk Diversification

Portfolio risk is mitigated by investing in a diversified spread of investments. Investments in any one company shall not, at the time of acquisition, exceed 15% of the value of the Company’s investment portfolio. Typically it is expected that the Company will hold a portfolio of between 100 and 180 securities, predominantly most of which will represent no more than 1.5% of the value of the Company’s investment portfolio as at the time of acquisition.

The Company will not invest more than 10% of its gross assets, at the time of acquisition, in other listed closed-ended investment funds, whether managed by the Manager or not, except that this restriction shall not apply to investments in listed closed-ended investment funds which themselves have stated investment policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds. In addition to this restriction, the Directors have further determined that no more than 15% of the Company’s gross assets will, at the time of acquisition, be invested in other listed closed-ended investment funds (including investment trusts) notwithstanding whether or not such funds have stated policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds.

Unquoted Investments

The Company may invest in unquoted companies from time to time subject to prior Board approval. Investments in unquoted companies in aggregate will not exceed 5% of the value of the Company’s investment portfolio as at the time of investment.

Borrowing and Gearing Policy

The Board considers that long-term capital growth can be enhanced by the use of gearing which may be through bank borrowings and the use of derivative instruments such as contracts for differences. The Company may borrow (through bank facilities and derivative instruments) up to 15% of NAV (calculated at the time of borrowing).

The Board oversees the level of gearing in the Company, and reviews the position with the Manager on a regular basis.

In the event of a breach of the investment policy set out above and the investment and gearing restrictions set out therein, the Manager shall inform the Board upon becoming aware of the same and if the Board considers the breach to be material, notification will be made to the LSE.

No material change will be made to the investment policy without the approval of shareholders by ordinary resolution.

BUSINESS MODEL

Diverse was launched on 28 April 2011. It is registered in England as a public limited company and is an investment company in accordance with the provisions of Sections 832 and 833 of the Companies Act 2006.

The principal activity of the Company is to carry on business as an investment trust. The Company intends at all times to conduct its affairs so as to enable it to qualify as an investment trust for the purposes of Sections 1158/1159 of the Corporation Tax Act 2010 (“S1158/1159”). The Directors do not envisage any change in this activity in the foreseeable future.

The Company has been granted approval from HM Revenue & Customs (“HMRC”) as an investment trust under S1158/1159 and will continue to be treated as an investment trust company, subject to there being no serious breaches of the conditions for approval.

The principal conditions that must be met for continuing approval by HMRC as an investment trust are that the Company’s business should consist of “investing in shares, land or other assets with the aim of spreading investment risk and giving members of the company the benefit of the results” and the Company may only retain 15% of its investment income without distributing it as dividend payments. The Company must also not be a close company. The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 May 2020 so as to be able to continue to qualify as an investment trust.

The Company’s status as an investment trust allows it to obtain an exemption from paying taxes on the profits made from the sale of its investments and all other net capital gains.

The Company has a wholly-owned subsidiary, DIT Income Services Limited. The purpose of the subsidiary is to invest in shorter-term holdings, where the gains after corporation tax can be passed up to the parent company by way of dividends, thus improving the position of the Company’s revenue account.

Investment Policy

The Company’s full investment policy set out above contains information on the policies which the Company follows relating to asset allocation, risk diversification and gearing, and includes maximum exposures, where relevant.

The Company invests primarily in UK-quoted or traded companies with a wide range of market capitalisations but a long-term bias toward small and mid cap equities with a view to achieving the Company’s investment objective. Currently, the Company’s entire portfolio is invested in publicly listed stocks.

The Manager adopts a stock-specific approach in managing the Company’s portfolio and therefore sector weightings will be of secondary consideration. As a result of this approach, the Company’s portfolio will not track any benchmark index.

At the Annual General Meeting (“AGM”) held on 9 October 2019, shareholders approved a change to the Company’s investment policy to increase the minimum and maximum number of securities that may be held in the portfolio.

Key Performance Indicators

The Board reviews the Company’s performance by reference to a number of KPIs and considers that the most relevant KPIs are those that communicate the financial performance and strength of the Company as a whole. The Board and the Manager monitor the following KPIs:

  • NAV performance, relative to the UK Equity Income sector and other comparable investment trusts and open-ended funds and to various UK stock market indices.

The NAV at 31 May 2020 was 88.82p per share (2019: 95.17p). The total return of the Company over the year, including the dividend income from the portfolio, was -2.5%. This compares with its peer group, the UK Equity Income sector, where the average was a 14.8% decrease in total return terms. By comparison, the total return on the FTSE All-Share Index was -11.2% over the year, on the FTSE SmallCap Index (excluding Investment Companies) was -17.1% and on the FTSE AIM All-Share Index was -7.7%.

  • NAV volatility

The Company has an objective to deliver attractive returns whilst having an eye to constraining volatility relative to other similar investment trusts. For the year to 31 May 2020, the Company’s NAV had a volatility of 12.2%1. This compares to the peer group, where the average was 18.4%.

  • Movements in the Company’s share price

The Company’s share price decreased by 1.2% over the year on a total return basis, including the 3.91p2 dividends paid. This compares with its peer group, where the average move was a decrease of 14.8%.

  • The discount of the share price in relation to the NAV

The Company has an objective to keep the discount to NAV at a minimum. Over the year to 31 May 2020, the Company’s share price has fallen behind the movement of the NAV, and the average discount to NAV over the year was 5.6%.

  • The Company’s dividend growth rate

The Company has an objective to deliver an attractive and growing dividend over the longer term. The Company has paid/declared four ordinary dividends totalling 3.70p for the year, representing a yield of 4.3% (based on an average share price of 86.91p). This was an increase of 1.4% compared with ordinary dividends paid last year, although the Company did pay a special dividend of 0.16p last year. In comparison to the peer group, the Company’s ordinary dividends have grown at 7.9% since the Company was issued in April 2011, and this compares with the dividend growth of the peer group of 7.5%3. In total, 26.65p worth of dividends have been distributed by the Trust since launch in April 2011 compared to a share price at the time of 50p.

  • Ongoing charges

The ongoing charges for the year to 31 May 2020 amounted to 1.09% (2019: 1.16%) of total assets. A summary of the total costs involved in managing the Company can be found above.

¹ Source: Datastream.

² Average of the other UK Equity Income Trusts that have reported over the previous 12 months. Source: Morningstar.

Dividends

Ordinary dividends totalling 3.70p per ordinary share have been paid, declared or proposed in respect of the year ended 31 May 2020.

First interim dividend: 0.85p paid on 28 February 2020 (28 February 2019: 0.80p)
Second interim dividend: 0.90p paid on 31 May 2020 (31 May 2019: 0.85p)
Third interim dividend: 0.90p payable on 28 August 2020 (30 August 2019: 0.90p)
Final dividend: 1.05p payable on 30 November 2020 (29 November 2019: 1.10p as well as a special dividend of 0.16p)

A final dividend of 1.05p per ordinary share has been recommended by the Board. Subject to shareholder approval at the forthcoming AGM, the dividend will be paid on 30 November 2020 to shareholders on the register at the close of business on 25 September 2020. The ex-dividend date will be 24 September 2020.

Principal Risks and Uncertainties

The Company is exposed to a variety of risks and uncertainties that could cause its asset price or the income from the investment portfolio to reduce, possibly by a sizeable percentage in the most adverse circumstances. The Board, through delegation to the Audit Committee, has undertaken a robust assessment and review of the principal risks facing the Company, together with a review of any new risks which may have arisen during the year, including those that would threaten its business model, future performance, solvency or liquidity. These risks are formalised within the Company’s risk matrix. Information regarding the Company’s internal control and risk management procedures can be found in the Corporate Governance Statement in the full Annual Report. Whilst reviewing the principal risks and uncertainties, the Board was cognisant of the risks posed by the COVID-19 pandemic.

The principal financial risks and the Company’s policies for managing these risks, and the policy and practice with regard to financial instruments are summarised in note 19 to the financial statements.

The Board has also identified the following principal risks and uncertainties:

Investment and strategy
Risk: There can be no guarantee that the investment objective of the Company will be achieved.

The Company does not follow any benchmark. Accordingly, the portfolio of investments held by the Company will not mirror the stocks and weightings that constitute any particular index or indices, which may lead to the Company’s shares failing to follow either the direction or extent of any moves in the financial markets generally (which may or may not be to the advantage of shareholders).
Mitigation: The Manager has in place a dedicated investment management process which is designed to maximise the chances of the investment objective being achieved. The Board reviews regular investment and financial reports from the Manager to monitor this.
Smaller companies
Risk: The Company will invest primarily in quoted UK companies with a wide range of market capitalisations but a long-term bias toward small and mid cap equities. Smaller companies can be expected, in comparison to larger companies, to operate over a narrower range of products, have more restricted depth of management and a higher risk profile. In addition, the relatively small market capitalisation of such companies can make the market in their shares less liquid. Prices of individual smaller capitalisation stocks could be more volatile than prices of larger capitalisation stocks and the risk of insolvency of many smaller companies (with the attendant losses to investors) is higher.
Mitigation: The Board looks to mitigate this risk by ensuring the Company holds a spread of investments, achieved through limiting the size of new holdings at the time of investment to typically between 1% and 1.5% of the portfolio. All potential investee companies are researched by the Manager prior to investment.
Sectoral diversification
Risk: The Company is not constrained from weighting to any sector. This may lead to the Company having significant exposure to portfolio companies from certain business sectors from time to time. Greater concentration of investments in any one sector may result in greater volatility in the value of the Company’s investments and consequently its NAV.
Mitigation: The Company seeks to achieve attractive returns by investing in weightings that are different from the overall market, yet also seeks to ensure that individual variances are not so extreme as to leave shareholders at risk of portfolio volatility that is unreasonably poor. Even though there may be significant exposures to a single sector, this will be achieved by holding a number of different stocks in the portfolio.
Dividends
Risk: The Company’s investment objective includes the aim of providing shareholders with an attractive and growing dividend. There is no guarantee that any dividends will be paid in respect of any financial year or period. The ability to pay dividends is dependent on a number of factors, including the level of dividends earned from the portfolio and the net revenue profits available for that purpose.

The redemption of shares pursuant to the redemption facility may also reduce distributable reserves to the extent that the Company is unable to pay dividends.
Mitigation: The Company maintains accounting records and produces forecasts that are designed to reduce the likelihood that the Company will not have sufficient distributable resources to meet its dividend objective.

The pandemic has caused the Thrust’s dividend income to drop but there remain sufficient reserves for the Trust to maintain its dividend policy.
Share price volatility and liquidity/marketability risk
Risk: The market price of the Company’s shares, like shares in all investment companies, may fluctuate independently of the NAV and thus may not reflect the underlying NAV of the shares. The shares could trade at a discount or premium to NAV at different times, depending on factors such as supply and demand for the shares, market conditions and general investor sentiment.
Mitigation: The Company has in place an annual redemption facility whereby shareholders can voluntarily tender their shares. The Board monitors the relationship between the share price and the NAV. The Company has taken powers to re-purchase shares should there be a sustained imbalance in the supply and demand leading to a discount. The Company has powers to issue shares (only at a premium to NAV) should there be good investment opportunities and the size of the Company has not become too large to continue to meet its objectives.

The pandemic has impacted the volatility of the shares of the Trust, along with other quoted shares .
Gearing
Risk: The Company’s investment strategy may involve the use of gearing to enhance investment returns, which exposes the Company to risks associated with borrowings. Gearing may be generated through the use of options, futures, options on futures, swaps and other synthetic or derivative financial instruments. Such financial instruments inherently contain much greater leverage than a non-margined purchase of the underlying security or instrument.

While the use of borrowings should enhance the total return on the shares where the return on the Company’s underlying assets is rising and exceeds the cost of borrowing, it will have the opposite effect where the return on the Company’s underlying assets is rising at a lower rate than the cost of borrowing or falling, further reducing the total return on the shares.

As a result, the use of borrowings by the Company may increase the volatility of the NAV per share.
Mitigation: The Company has a revolving loan facility in place, as detailed in note 5 to the financial statements. At 31 May 2020, the facility was undrawn.

The Company is limited to a maximum gearing of 15% of the net assets. There was no gearing at 31 May 2020 (2019: nil).
Key man risk
Risk: The Company depends on the diligence, skill, judgement and business contacts of the Manager’s investment professionals and its future success could depend on the continued service of these individuals, in particular Gervais Williams.
Mitigation: The Company is managed by a team of two at Premier Miton, Gervais Williams and Martin Turner, and this moderates the key man risk were one or the other to leave Premier Miton’s employment. Furthermore, the Company may terminate the Management Agreement should Gervais Williams cease to be an employee of the Manager’s group and is not replaced by a person whom the Company considers to be of equal or satisfactory standing within three months of his departure.
Engagement of third party service providers
Risk: The Company has no employees and the Directors have all been appointed on a non-executive basis. Whilst the Company has taken all reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations, the Company is reliant upon the performance of third party service providers for its executive function.
Mitigation: The Company operates through a series of contractual relationships with its service providers. These contracts, supported by service level agreements where appropriate, set out the terms on which a service is to be provided to the Company. The Board reviews performance of all the service providers both in the Board meetings and in the Management Engagement Committee meetings, where the terms on which the service providers are engaged are also reviewed. The Board also receives assurance or internal controls reports from key service providers. In addition, the contracts provide the Company with protection in the event of failure to perform by a service provider.

The Board considered the impact of the pandemic on each of the service providers, including the Manager, and found them all to be operating effectively.

SHARE CAPITAL

The Company’s share capital consists of redeemable ordinary shares of 0.1p each with one vote per share and non-voting management shares of £1 each. From time to time, the Company may issue C ordinary shares of 1p each with one vote per share.

The Company’s shares have the following rights:

Voting: the ordinary and C shares have equal voting rights. At shareholder meetings, members present in person or by proxy have one vote on a show of hands and on a poll have one vote for each share  held. Management shares are non-voting.

Dividends: the assets of the ordinary and C shares are separate and each class is entitled to dividends declared on their respective asset pool. The management shares are entitled to receive, in priority to the holders of any other class of shares, a fixed cumulative dividend equal to 0.00001p per annum.

Capital: if there are any C shares in issue, the surplus capital and assets of the Company shall, on a winding-up or on a return of capital, be applied amongst the existing ordinary shareholders and the management shareholders pro rata according to the nominal capital paid up on their holdings after having deducted therefrom an amount equivalent to the assets and liabilities relating to the C shares, which amount shall be applied amongst the C shareholders pro rata according to the nominal capital paid up on their holdings of C shares.

When there are no C shares in issue, any surplus shall be divided amongst the ordinary shareholders and management shareholders pro rata according to the nominal capital paid up on their holdings of ordinary shares and management shares.

In each instance, the holders of the management shares shall only receive an amount up to the capital paid up on such management shares and the management shares shall not confer the right to participate in any surplus remaining following payment of such amount.

As at the date of this Report, there were 358,045,105 ordinary shares in issue, none of which were held in treasury, and 50,000 management shares.

The Company has a redemption facility through which shareholders are entitled to request the redemption of all or part of their holding of ordinary shares on an annual basis on 31 May in each year. The Board may, at its absolute discretion, elect not to operate the annual redemption facility in whole or in part, although it has indicated that it is minded to approve all requests.

Further details of the capital structure can be found in note 9 to the financial statements.

Share Issues

At the AGM held on 9 October 2019, the Directors were granted authority to allot ordinary shares up to an aggregate nominal amount of £37,828 (being approximately 10% of the issued ordinary share capital). This authority is due to expire at the Company’s AGM on 14 October 2020.

The Company has a block listing of ordinary shares to be listed to the premium segment of the Official List of the FCA and admitted to trading on the premium segment of the LSE’s main market. During the year ended 31 May 2020, no ordinary shares were issued.

As at the year end and the date of this Report, a further 9,999,999 shares remain under the block listing.

Proposals for renewal of the Directors’ authority to issue shares are set out in the full Annual Report.

There are no restrictions concerning the transfer of securities in the Company or on voting rights; no special rights with regard to control attached to securities; no agreements between holders of securities regarding their transfer known to the Company; and no agreements which the Company is party to that might affect its control following a successful takeover bid.

Purchase of Own Shares

At the AGM held on 9 October 2019, the Directors were granted the authority to buy back up to 56,705,528 ordinary shares. No ordinary shares have been bought back under this authority. The authority will expire at the next AGM when a resolution for its renewal will be proposed (see the Directors’ Report in the full Annual Report for further information). Any shares bought back under this authority will not be sold from treasury at a price lower than the prevailing NAV at that time.

Treasury Shares

Shares bought back by the Company may be held in treasury, from where they could be re-issued at a premium to NAV quickly and cost effectively. This provides the Company with additional flexibility in the management of its capital base. No shares were purchased for, or held in, treasury during the year or since the year end.

Share Redemptions

Valid redemption requests were received under the Company’s redemption facility for the 29 May 2020 Redemption Point in relation to 20,243,942 ordinary shares, representing 5.351% of the issued share capital. These shares were redeemed and cancelled by the Company with effect from 12 June 2020. All shareholders who validly applied to have shares redeemed received a calculated Redemption Price of 89.76p per share.

Current Share Capital

As at the year end, there were 378,289,047 ordinary shares and 50,000 management shares (see note 9 to the financial statements) in issue.

Subsequent to the year end, 20,243,942 ordinary shares were redeemed and cancelled in respect of the 29 May 2020 Redemption Point. As at the date of this Report, there were therefore 358,045,105 ordinary shares in issue.

STAKEHOLDER ENGAGEMENT

A discussion of the Company’s Stakeholders and how the Directors discharge their duties to Stakeholders under section 172 of the Companies Act 2006, is included on pages 23 and 24 of the Annual Report.

MANAGEMENT, SOCIAL, ENVIRONMENTAL AND DIVERSITY MATTERS

Management Arrangements

The Company appointed Premier Portfolio Managers Limited (“PPM” or the “Manager”) as its Alternative Investment Fund Manager (“AIFM”) and its Manager, following the novation of the Appointment of Manager agreement on 24 April 2020. PPM has been approved as an AIFM by the UK’s FCA.

The Manager receives a management fee of 0.9% per annum on the average market capitalisation of the Company up to £300m and 0.8% per annum on the average market capitalisation between £300m and £500m and 0.7% per annum on the average market capitalisation above £500m.

In addition to the basic management fee, and for so long as a Redemption Pool (see page 88 of the Annual Report for details) is in existence, the Manager is entitled to receive from the Company a fee calculated at the rate of one-twelfth of 1.0% per calendar month of the NAV of the Redemption Pool on the last business day of the relevant calendar month.

In accordance with the Directors’ policy on the allocation of expenses between income and capital, in each financial year, 75% of the management fee payable is charged to capital and the remaining 25% to revenue.

The Management Agreement is terminable by either the Manager or the Company giving to the other not less than 12 months’ written notice. The Management Agreement may be terminated earlier by the Company with immediate effect on the occurrence of certain events, including the liquidation of the Manager or appointment of a receiver or administrative receiver over the whole or any substantial part of the assets or undertaking of the Manager or a material breach by the Manager of the Management Agreement which is not remedied. The Company may also terminate the Management Agreement should Gervais Williams cease to be an employee of the Manager’s group and is not replaced by a person whom the Company considers to be of equal or satisfactory standing within three months of his departure.

The Company has given certain market standard indemnities in favour of the Manager in respect of the Manager’s potential losses in carrying on its responsibilities under the Management Agreement.

The Board appointed Bank of New York Mellon as its Depositary and Custodian under an agreement dated 22 July 2014. The annual fee for depositary services due to Bank of New York Mellon is 0.02% of gross assets, subject to a minimum fee of £15,000 per annum. The Company and the Depositary may terminate the Depositary Agreement with three months’ written notice.

Company secretarial and administrative services are provided by Link Alternative Fund Administrators Limited, under an agreement dated 7 April 2011. This agreement may be terminated by 12 months’ written notice subject to provisions for earlier termination as provided therein.

Continuing Appointment of the Manager

The Board keeps the performance of the Manager under continual review, and the Management Engagement Committee conducts an annual appraisal of the Manager’s performance, and makes a recommendation to the Board about the continuing appointment of the Manager. It is the opinion of the Directors that the continuing appointment of the Manager is in the interests of shareholders as a whole. The reasons for this view are that the Manager has executed the investment strategy according to the Board’s expectations and has demonstrated superior risk-adjusted returns relative to the broader market and the peer group.

The Directors also believe that by paying the management fee calculated on a market capitalisation basis, rather than a percentage of assets basis, the interests of the Manager are more closely aligned with those of shareholders.

Environmental, Human Rights, Employee, Social and Community Issues

Since the Company does not have any employees, the day-to-day management of these areas is delegated to the Manager. As an investment trust, the Company has no direct impact on the community or the environment, and as such has no environmental, human rights, social or community policies.

Environmental, Social and Governance (“ESG”) factors are central to the investment process as misjudgements on these matters can incur major additional costs to the portfolio holdings, as well as undermining their equity return through reputational damage. In company meetings, the Manager routinely questions the corporate management on a variety of topics, such as safety records and the make-up of their board papers, to ensure companies are adhering to best practice. These questions can be quite wide ranging. For example, the Manager has raised issues ranging from the use of antibiotics in livestock, to how individual companies monitor the working conditions in the overseas plants of their suppliers.

Gender Diversity

The Board of Directors of the Company comprises two female and four male Directors.

The Company’s Diversity Policy acknowledges the benefits of greater diversity, including gender diversity, and the Board remains committed to ensuring that the Company’s Directors bring a wide range of skills, knowledge, experience, backgrounds and perspectives. Details of the Company’s Diversity Policy are set out in the Corporate Governance Statement in the full Annual Report.

The Strategic Report has been approved by the Board of Directors.

On behalf of the Board

Michael Wrobel

Chairman

17 August 2020

Directors

Michael Wrobel – Chairman of the Board

Andrew Bell –  Senior Independent Director

Paul Craig

Caroline Kemsley-Pein – Chairman of the Management Engagement Committee

Michelle Mcgrade

Calum Thomson – Chairman of the Audit Committee

All Directors are non-executive and are independent of the Manager.

EXTRACTS FROM THE REPORT OF THE DIRECTORS

Results and Dividends

A final dividend of 1.05p is recommended. Subject to shareholder approval at the forthcoming AGM, this dividend will be payable on 30 November 2020 to shareholders on the register at close of business on 25 September 2020. The ex-dividend date will be 24 September 2020. The dividends paid or payable in respect of the year ended 31 May 2020 are set out in the Strategic Report.

Going Concern

The Directors consider that it is appropriate to adopt the going concern basis in preparing the financial statements. After making enquiries, and bearing in mind the nature of the business and assets of the Company and its subsidiary (“the Group”), the Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. In arriving at this conclusion, the Directors have considered the liquidity of the portfolio and the Group’s ability to meet obligations as they fall due for a period of at least 12 months from the date that these financial statements were approved.

Cash flow projections have been reviewed and show that the Group has sufficient funds to meet both its contracted expenditure and its discretionary cash outflows in the form of the dividend policy.

Viability Statement

The Directors have assessed the viability of the Company over a three-year period, taking account of the Company’s position and the risks as set out in the Strategic Report. The period assessed balances the long-term aims of the Company, the Board’s view that the success of the Company is best assessed over a longer time period and the inherent uncertainty of looking out for too long a period. The present pandemic has demonstrated the short term volatility of the stock markets and as a result the board consider it appropriate to continue to review the viability of the company over a three year time period which balances the long term nature of investing against the short term liquidity of the investments.

As part of its assessment of the viability of the Company, the Board has considered the emerging and principal risks and uncertainties and the impact on the Company’s portfolio of a significant fall in UK markets. The Directors do not expect there to be any significant change in the current principal risks and adequacy of the mitigating controls in place over the period of this assessment.

To provide this assessment, the Board has considered the Company’s financial position and its ability to liquidate its portfolio to meet its expenses or other liabilities as they fall due:

  • The Company invests largely in companies listed and traded on stock exchanges. These are actively traded, and whilst perhaps less liquid than larger quoted companies, the portfolio is well diversified by both number of holdings and industry sector.
  • The expenses of the Company are predictable and modest in comparison with the assets in the portfolio. There are no commitments that would change that position.
  • The Company has an annual redemption facility whereby shareholders may request that their shares are redeemed at NAV. The Board has considered the possibility that shareholders holding a significant percentage of the Company’s shares request redemption. Firstly, the Board has flexibility over the method of redemption so as to avoid disruption to the overall operation of the Company in this situation. Secondly, the Company’s investments comprise readily realisable securities which can be sold to meet funding requirements if necessary. The most significant of the Company’s expenses vary in proportion to the size of the Company.

In addition to considering the emerging and principal risks set out above and the financial position of the Company as described above, the Board has also considered the following factors:

  • the continuing relevance of the Company’s investment objective in the current environment;
  • the level of demand for the Company’s shares and that since launch, the Company has been able to issue further shares;
  • the gearing policy of the Company; and
  • that regulation will not increase to such extent that the costs of running the Company become uneconomical.

The Board has reviewed the influence of the COVID-19 pandemic on its service providers and is satisfied with the ongoing services provided to the Company.

Accordingly, the Directors have formed the reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next three years.

Company Culture

The Company’s defined purpose is to deliver our investment objective: to pay shareholders a good and growing dividend income. The Directors believe that this will be facilitated by establishing and maintaining a healthy corporate culture among the Board and in its interaction with the Investment Manager, shareholders and other stakeholders.

The Board strives for its culture to be in line with the Company’s purpose, values and strategy. Whilst ensuring that it does not conflict with the investment objective, the Board aims to structure the Company’s operations in such a manner that it takes all its stakeholders and the impact of the Company’s operations on the environment and community into account.

In addition, the Board promotes and monitors the effective management or mitigation of the risks faced by the Company.

As the Company has no employees and acts through its Board and service providers, its culture is represented by the values and behaviour of those parties. Accordingly, the Board assesses and takes account of the organisational effectiveness of its service providers (including “soft” factors such as openness and team work) as well as their regulatory compliance. The Board is responsible for ensuring that the Company’s culture is embedded in its day to day operations and it has adopted a number of policies and practices to facilitate this. In recognition of the Company’s corporate and social responsibilities and to safeguard the Company’s interests, the Board engages with the Company’s service providers and other stakeholders. As part of this ongoing monitoring, the board receives reports from its service providers with respect to their antibribery and corruption policies; Modern Slavery Act 2015 statements; equal opportunities and diversity policies; and greenhouse gas and energy use reporting.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable United Kingdom law and IFRS as adopted by the European Union.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with IFRS. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that year.

In preparing the Group financial statements, the Directors are required to:

  • select suitable accounting policies in accordance with IAS 8: ‘Accounting Policies, Changes in Accounting Estimates and Errors’ and then apply them consistently;
  • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
  • provide additional disclosures when compliance with specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance;
  • state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements;
  • make judgements and estimates that are reasonable and prudent; and
  • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations, and for ensuring that the Annual Report includes information required by the Listing Rules of the FCA.

The financial statements are published on the Company’s website, www.mitongroup.com/dit, which is maintained on behalf of the Company by the Manager. Under the Management Agreement, the Manager has agreed to maintain, host, manage and operate the Company’s website and to ensure that it is accurate and up-to-date and operated in accordance with applicable law. The work carried out by the Auditor does not involve consideration of the maintenance and integrity of this website and accordingly, the Auditor accepts no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom covering the preparation and dissemination of the financial statements may differ from legislation in their jurisdiction.

We confirm that to the best of our knowledge:

  • the Group financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and return of the Company (and the Group as a whole); and
  • this Annual Report includes a fair review of the development and performance of the business and the position of the Group together with a description of the emerging and principal risks and uncertainties that it faces.

The Directors consider that the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.

On behalf of the Board

Michael Wrobel

Chairman

17 August 2020

NON-STATUTORY ACCOUNTS

The financial information set out below does not constitute the Company’s statutory accounts for the years ended 31 May 2020 and 31 May 2019 but is derived from those accounts. Statutory accounts for 2019 have been delivered to the Registrar of Companies, and those for 2020 will be delivered in due course. The Auditor has reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor’s report can be found in the Company’s full Annual Report at: www.mitongroup.com/dit.

CONSOLIDATED INCOME STATEMENT

  Year ended
  31 May 2020
  Year ended
 31 May 2019
Notes Revenue  return 
£000 
Capital  return 
£000 
Total 
£000 
Revenue  return 
£000 
Capital  return 
£000 
Total 
£000 
Losses on investments held at fair value through profit or loss 12 (32,881) (32,881) (33,171) (33,171)
Foreign exchange losses (33) (33) (48) (48)
Gains/(losses) on derivatives held at fair value through profit or loss 13 13,674  13,674  (2,914) (2,914)
Income 2 14,101  14,101  17,100  17,100 
Management fee 3 (744) (2,234) (2,978) (900) (2,700) (3,600)
Other expenses 4 (841) (841) (781) (781)
Return on ordinary activities before finance costs and taxation 12,516  (21,474) (8,958) 15,419  (38,833) (23,414)
Finance costs 5 (28) (82) (110) (30) (91) (121)
Return on ordinary activities before taxation 12,488  (21,556) (9,068) 15,389  (38,924) (23,535)
Taxation – irrecoverable withholding tax 6 (67) (67) (228) (228)
– prior years recoverable withholding tax now irrecoverable (59) (59) (17) (17)
Return on ordinary activities after taxation 7 12,362  (21,556) (9,194) 15,144  (38,924) (23,780)
pence  pence  pence  pence  pence  pence 
Return per ordinary share 7 3.27  (5.70) (2.43) 3.95  (10.14) (6.19)

The total column of this statement is the Income Statement of the Group prepared in accordance with IFRS, as adopted by the European Union. The supplementary revenue and capital columns are presented in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies (“AIC SORP”).

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year.

There is no other comprehensive income, and therefore the return on ordinary activities after tax is also the total comprehensive income.

The notes below form part of these financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Group


Notes

Share 
capital 
£000 
Share 
premium 
account 
£000 
Capital redemption reserve
£000

Special 
reserve 
£000 

Capital 
reserve 
£000 

Revenue  reserve 
£000 


Total 
£000 
As at 1 June 2019 434  192,562 - 45,775  108,999 17,470  365,240

Total comprehensive income:
Net return for the year - (21,556) 12,362  (9,194)
Transactions with shareholders recorded directly to equity:
Cancellation of ordinary shares (6) - 6 (5,245) (5,245)
Equity dividends paid 8 - - (14,791) (14,791)
As at 31 May 2020 428  192,562 6 40,530  87,443  15,041  336,010 

   

Group


Notes

Share 
capital 
£000 
Share 
premium 
account 
£000 
Capital Redemption Reserve
£000

Special 
reserve 
£000 

Capital 
reserve 
£000 

Revenue 
 reserve 
£000 


Total 
£000 
As at 1 June 2018 434  192,244  - 45,775  147,923  16,639  403,015 

Total comprehensive income:
Net return for the year - - - - (38,924) 15,144  (23,780)
Transactions with shareholders recorded directly to equity:
Issue of ordinary shares - 318 - - 318 
Equity dividends paid
8
- - - - (14,313) (14,313)
As at 31 May 2019 434 192,562 - 45,775 108,999 17,470  365,240 

The notes below form part of these financial statements.

PARENT COMPANY STATEMENT OF CHANGES IN EQUITY



Company



Notes

Share 
capital 
£000 
Share
premium
account
£000
Capital redemption reserve
£000

Special
reserve
£000

Capital
reserve
£000

Revenue 
reserve 
£000 


Total 
£000 
As at 1 June 2019 434  192,562 - 45,775 108,999 16,570  364,340 

Total comprehensive income:
 
Net return for the year - - (21,556) 12,277  (9279)

Transactions with shareholders recorded directly to equity:
Cancellation of ordinary shares (6) - 6 (5,239) (5,245)
Equity dividends paid 8 - - (14,791) (14,791)
As at 31 May 2020 428 192,562   6 40,536  87,443  14,056  335,025 

   



Company



Notes

Share
capital
£000
Share
premium
account
£000
Capital redemption reserve
£000

Special
reserve
£000

  Capital 
reserve 
£000 

Revenue 
reserve 
£000 


Total 
£000 
As at 1 June 2018 434 192,244 - 45,775 147,923  15,795  402,171 

Total comprehensive income:
Net return for the year - - - - (38,924) 15,088  (23,836)

Transactions with shareholders recorded directly to equity:
Issue of ordinary shares - 318 - - 318 
Equity dividends paid 8 - - - - (14,313) (14,313)
As at 31 May 2019 434 192,562 - 45,775 108,999  16,570  364,340 

The notes below form part of these financial statements.

CONSOLIDATED AND PARENT COMPANY BALANCE SHEETS


Notes
Group 
31 May 2020 
£000 
Group 
31 May 2019 
£000 
Company 
31 May 2020 
£000 
Company 
31 May 2019 
£000 
Non-current assets:
Investments held at fair value through profit or loss
12
310,398  326,248  310,398  326,248 
Current assets:
Derivative instruments 13 6,313  6,313 
Trade and other receivables 16 2,717  5,587  2,717  5,587 
Cash and cash equivalents 25,816  27,495  25,816  27,495 
28,533  39,395  28,533  39,395 

Current liabilities:
Trade and other payables 17 (2,921) (403) (3,906) (1,303)
(2,921) (403) (3,906) (1,303)

Net current assets
25,612  38,992  24,627  38,092 
Total net assets 336,010  365,240  335,025  364,340 

Capital and reserves:
Share capital – ordinary shares 9 378  384  378  384 
Share capital – management shares 9 50  50  50  50 
Share premium account 10 192,562  192,562  192,562  192,562 
Capital redemption reserve 10
Special reserve 10 40,530  45,775  40,530  45,775 
Capital reserve 10 87,443  108,999  87,443  108,999 
Revenue reserve 10 15,041  17,470  14,056  16,570 
Shareholders’ funds 336,010  365,240  335,025  364,340 

pence 

pence 
Net asset value per ordinary share 11 88.82  95.17 

The amount of the Company's return for the financial year is a loss after tax of £9,279,000 (2019: loss of £23,836,000).

These financial statements were approved and authorised for issue by the Board of The Diverse Income Trust plc on 17 August 2020 and were signed on its behalf by:

Michael Wrobel

Chairman

Company No: 7584303

The notes below form part of these financial statements.

CONSOLIDATED AND PARENT COMPANY CASH FLOW STATEMENTS

Group 
31 May 2020 
£000 
Group 
31 May 2019 
£000 
Company 
31 May 2020 
£000 
Company 
31 May 2019 
£000 
Operating activities:
Net return before taxation (9,068) (23,535) (9,153) (23,591)
Losses on investments and derivatives held at fair value through profit or loss 19,207  36,085  19,207  36,085 
Finance costs 112  100  112  100 
Decrease/(increase) in trade and other receivables 76  (3,256) 76  (3,256)
(Decrease)/increase in trade and other payables (33) (2,666) 52  (2,609)
Withholding tax recoverable/(paid) (126) (245) (126) (245)
Net cash inflow from operating activities 10,168  6,483  10,168  6,484 
Investing activities:
Purchase of investments (138,046) (99,709) (138,046) (99,709)
Sale of investments 126,360  122,957  126,360  122,957 
Purchase of derivative instruments (6,753) (6,753)
Sale of derivative instruments 19,987  1,904  19,987  1,904 
Net cash inflow from investing activities 8,301  18,399  8,301  18,399 
Financing activities:
Ordinary shares issued 318  318 
Cancellation of shares (5,245) (5,245)
Finance costs paid (112) (100) (112) (100)
Equity dividends paid (14,791) (14,313) (14,791) (14,313)
Net cash outflow from financing (20,148) (14,095) (20,148) (14,095)
(Decrease)/increase in cash and cash equivalents (1,679) 10,787  (1,679) 10,788 
Reconciliation of net cash flow movements in funds:
Cash and cash equivalents at the start of the year 27,495  16,708  27,495  16,707 
Net cash (outflow)/inflow from cash and cash equivalents (1,679) 10,787  (1,679) 10,788 
Cash and cash equivalents at the end of the year 25,816  27,495  25,816  27,495 
Cash and cash equivalents comprise the following:
Cash at bank 25,816  27,495  25,816  27,495 
25,816  27,495  25,816  27,495 
Cash and cash equivalents received/(paid) during the year includes:
Dividend received 10,433 11,593 10,433 11,593
 Interest received and other income 3,676 5,278 3,676 5,222

The notes below form part of these financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 General Information and Significant Accounting Policies

The Diverse Income Trust plc is a company incorporated and registered in England and Wales. The principal activity of the Company is that of an investment trust company within the meaning of Sections 1158/1159 of the Corporation Tax Act 2010.

The Group’s annual financial statements for the year ended 31 May 2020 have been prepared in conformity with IFRS as adopted by the European Union, which comprise standards and interpretations approved by the International Accounting Standards Board (“IASB”), and as applied in accordance with the provisions of the Companies Act 2006. The annual financial statements have also been prepared in accordance with the AIC SORP for the financial statements of investment trust companies and venture capital trusts, except to any extent where it is not consistent with the requirements of IFRS.

Basis of Preparation

In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been prepared alongside the Income Statement.

The financial statements are presented in sterling, which is the Group’s functional currency as the UK is the primary environment in which it operates, rounded to the nearest £000, except where otherwise indicated.

Going Concern

The financial statements have been prepared on a going concern basis and on the basis that approval as an investment trust company will continue to be met. The Directors have made an assessment of the Company’s ability to continue as a going concern and are satisfied that the Company has the resources to continue in business for the foreseeable future, being a period of at least 12 months from the date these financial statements were approved. In making the assessment, the Directors have considered the likely impacts of the current COVID-19 pandemic on the Company, operations and the investment portfolio. The Directors noted the cash balance exceeds any short-term liabilities, the Company has access to a revolving credit facility which has not been drawn down and the Company holds a portfolio of investments listed on the London Stock Exchange. The Company is a closed-end fund, where assets are not required to be liquidated to meet day-to-day redemptions. The Directors have completed stress tests assessing the impact of changes in market value, income, the current annual redemption and future potential annual redemptions with associated cashflows. Whilst the economic future is uncertain, and the Directors believe it is possible the Company could experience further reductions in income and/or market value that this should not be to a level which would threaten the Company’s ability to continue as a going concern. The Directors, the Manager and other service providers have put in place contingency plans to minimise disruption. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Company’s ability to continue as a going concern, having taken into account the liquidity of the Company’s investment portfolio and the Company’s financial position in respect of its cash flows, borrowing facilities and investment commitments (of which there are none of significance). Therefore, the financial statements have been prepared on the going concern basis.

Basis of Consolidation

IFRS 10 sets out the principles for the presentation and preparation of consolidated financial statements and establishes a single control model that applies to all entities.

The Company has made the significant accounting judgement that the Company meets the definition of an investment entity. However, the Company’s wholly-owned subsidiary, DIT Income Services Limited, is an extension of the Company through which it provides services that relate to the investment entity’s investment activities and the subsidiary is not itself an investment entity.  The Group financial statements therefore consolidate the financial statements of the Company and its subsidiary, drawn up to 31 May 2020. The subsidiary is consolidated from the date of acquisition, being the date on which control was obtained, and will continue to be consolidated until the date that such control ceases. Control comprises being exposed, or having rights, to variable returns through its power over the investee. The financial statements of the subsidiary are prepared for the same reporting year as the parent Company, using consistent accounting policies. All inter-company balances and transactions, including unrealised profits arising from them, are eliminated.

As permitted by Section 408 of the Companies Act 2006, the Company has not presented its own Income Statement. The amount of the Company’s return for the financial year dealt with in the financial statements of the Group is a loss after tax of £9,279,000 (2019: loss of £23,836,000).

Segmental Reporting

The Directors are of the opinion that the Group is engaged in a single segment of business, being investment business. The Group primarily invests in companies listed in the UK.

Accounting Developments

In the current year, the Company has applied a number of amendments to IFRS, issued by the IASB. These include annual improvements to IFRS, changes in standards legislative and regulatory amendments, changes in disclosure and presentation requirements. The Company has also applied, with associated amendments, for the first time the following standards: IFRS 16 Leases sets out the principles for the recognition, measurement, presentation and disclosure of leases by lessors and lessees.

The adoption of the changes to accounting standards has had no material impact on the current or prior years' financial statements. The Company held no leases during the current or prior years.

There are a number of amendments to IFRS, legislation and regulatory requirements which will apply from 1 April 2020. These will not impact the financial statements other than requiring changes in disclosure and presentation amendments.

Critical Accounting Judgements and Key Sources of Estimation Uncertainty

The preparation of financial statements in conformity with accounting standards requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts in the financial statements. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The areas requiring the most significant judgement and estimation in the preparation of the financial statements are: accounting for the value of unquoted investments; valuation of derivatives; recognising and classifying unusual or special dividends received as either revenue or capital in nature; and setting the level of dividends paid and proposed in satisfaction of both the Company’s long-term objective and its obligations to adhere to investment trust status rules under Section 1158 of the Corporation Tax Act 2010. The policies for these are set out in the notes to the financial statements below.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future period if the revision affects both current and future periods. There were no accounting estimates or judgements that had a significant impact on the financial statements in the current period.

Investments

The Group’s business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided internally on that basis to the Group’s Board of Directors.

Upon initial recognition, the investments held by the Company, except for the investment in the subsidiary, are classified at ‘fair value through profit or loss’. They are included initially at fair value, which is taken to be their cost (excluding expenses incidental to the acquisition, which are written off in the Income Statement and allocated to ‘capital’ at the time of acquisition). When a purchase or sale is made under a contract, the terms of which require delivery within the timeframe of the relevant market, the investments concerned are recognised or derecognised on the trade date. Subsequent to initial recognition, investments are valued at fair value through profit or loss. For listed investments this is deemed to be bid market prices or closing prices for Stock Exchange Electronic Trading Service – quotes and crosses (“SETSqx”).

Changes in fair value of investments are recognised in the Income Statement as a capital item. On disposal, realised gains and losses are also recognised in the Income Statement as capital items.

The investment in the subsidiary company, DIT Income Services Limited, is held at cost £1 (2019: £1). Investments held as current assets by the subsidiary undertaking are classified as ‘held for trading’ and are at fair value. Dealing profits or losses on these investments are taken to revenue in the Income Statement. There were no investments held by the subsidiary at the year end (2019: none).

All investments for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy in note 12.

Foreign Currency

Transactions denominated in foreign currencies are converted to sterling at the actual exchange rate as at the date of the transaction. Monetary assets and liabilities and non-monetary assets held at fair value denominated in foreign currencies at the year end are reported at the rate of exchange at the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in the capital reserve or the revenue account depending on whether the gain or loss is of a capital or revenue nature.

Derivatives

Derivatives, including Index Put options, which are listed investments, are classified as financial instruments at fair value through profit or loss. Derivatives are initially recorded at cost (being premium paid to purchase the option) and subsequently valued at fair value and included in current assets/liabilities. Derivatives are derecognised when the contract expires or on the trade date when the contract is sold.

Changes in the fair value of derivative instruments are recognised as they arise in the capital column of the Income Statement. The fair value is calculated by either the quoted price (if listed) or a broker using models with inputs from market prices. On disposal or expiration, realised gains and losses are also recognised in the Income Statement as capital items.

Cash and Cash Equivalents

For the purposes of the Balance Sheet, cash comprises cash in hand and demand deposits. Cash equivalents are short-term, highly-liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.

For the purposes of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts when applicable.

Trade Receivables, Prepayments and Other Debtors

Trade receivables, prepayments and other debtors are recognised at amortised cost or estimated fair value.

Trade Payables and Short-term Borrowings

Trade payables and short-term borrowings are measured at amortised cost.

Income

Dividends receivable on quoted equity shares are taken to revenue on an ex-dividend basis. Dividends receivable on equity shares where no ex-dividend date is quoted are brought into account when the Company’s right to receive payment is established. Fixed returns on non-equity shares are recognised on a time-apportioned basis. Dividends from overseas companies are shown gross of any non-recoverable withholding taxes, which are disclosed separately in the Income Statement.

Special dividends are taken to the revenue or capital account depending on their nature. In deciding whether a dividend should be regarded as a capital or revenue receipt, the Board reviews all relevant information as to the reasons for the sources of the dividend on a case-by-case basis.

When the Company has elected to receive scrip dividends in the form of additional shares rather than in cash, the amount of the cash dividend forgone is recognised as income. Any excess in the value of the cash dividend is recognised in the capital column.

All other income is accounted for on a time-apportioned accruals basis and is recognised in the Income Statement.

Expenses and Finance Costs

All expenses are accounted for on an accruals basis. On the basis of the Board’s expected   long-term split of total returns in the form of capital and revenue returns of 75% and 25% respectively, the Company charges 75% of its management fee and finance costs to capital. All other administrative expenses are charged through the revenue column in the Income Statement.

Expenses incurred directly in relation to arranging debt and loan facilities have been capitalised and amortised over the term of the finance.

Expenses incurred directly in relation to placings and offers for subscription of shares are deducted from equity and charged to the share premium account.

Taxation

Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes at the reporting date. Deferred tax assets are only recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of timing differences can be deducted. In line with the recommendations of the AIC SORP, the allocation method used to calculate the tax relief on expenses charged to capital is the “marginal” basis. Under this basis, if taxable income is capable of being offset entirely by expenses charged through the revenue account, then no tax relief is transferred to the capital account.

No taxation liability arises on gains from sales of fixed asset investments by the Company by virtue of its investment trust status. However, the net revenue (excluding UK dividend income) accruing to the Company is liable to corporation tax at the prevailing rates.

The actual charge for taxation in the income statement relates to irrecoverable withholding tax on overseas dividends received during the year.

Dividends Payable to Shareholders

Dividends to shareholders are recognised as a liability in the period in which they are paid or approved in general meetings and are taken to the Statement of Changes in Equity. Dividends declared and approved by the Company after the Balance Sheet date have not been recognised as a liability of the Company at the Balance Sheet date.

Special Reserve

The special reserve was created by a cancellation of the share premium account by order of the High Court in February 2012. Its main purpose is to allow the Company to meet annual redemption requests for ordinary shares. The costs of repurchasing ordinary shares and meeting annual redemption requests, including related stamp duty and transaction costs, are also charged to the special reserve.

Share Capital

The Company classifies financial instruments issued as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. The share capital of the Company comprises redeemable ordinary shares (“ordinary shares”), C shares, when in issue, and management shares.

The Company is a closed-ended investment company with an unlimited life. The ordinary shares are not puttable instruments because redemption is conditional upon certain market conditions and/or Board approval. As such, they are not required to be classified as debt under IAS 32 ‘Financial Instruments: Disclosure and Presentation’.

As defined in the Articles of Association, redemption of ordinary shares is at the sole discretion of the Directors, therefore the ordinary shares have been classified as equity.

The issuance, acquisition and resale of ordinary shares are accounted for as equity transactions and no gain or loss is recognised in the Income Statement.

Share Premium

The share premium account represents the accumulated premium paid for shares issued in previous periods above their normal value less issue expenses. This is a reserve forming part of the non-distributable reserves. The following items are taken to this reserve:

  • costs associated with the issue of equity; and
  • premium on the issue of shares.

Capital Redemption Reserve

The capital redemption reserve represents non-distributable reserves that arise from the purchase and cancellation of shares.

Capital Reserve

The following are taken to this reserve:

  • gains and losses on the disposal of investments;
  • exchange difference of a capital nature;
  • expenses, together with the related taxation effect, allocated to this reserve in accordance with the above policies; and
  • increase and decrease in the valuation of investments held at the year end.

The capital reserve is distributable.

Revenue Reserve

The revenue reserve represents the surplus accumulated revenue profits and is distributable.

2 Income

Year ended
31 May 2020
£000
Year ended 
31 May 2019 
£000 
Income from investments:
UK dividends 10,346 11,839 
UK REIT dividend income 230 396 
Non UK dividend income 2,890 4,063 
UK fixed interest 516 648 
13,982 16,946 
Other income:
Bank deposit interest 17
Exchange (losses)/gains 17 (14)
Net dealing profit of subsidiary* 85 56 
Underwriting income - 100 
Other income -
Total income 14,101 17,100 

* Represents realised trading gains and losses from trading transactions. There are no other expenses/income in respect of the subsidiary.

3 Management Fee

Year ended
31 May 2020
Year ended
31 May 2019
Revenue
£000
Capital
£000
Total
£000
Revenue
£000
Capital
£000 
Total
£000
Management fee 744 2,234 2,978 900 2,700 3,600

The basic management fee payable to the Manager is calculated at the rate of one-twelfth of 0.9% of the average market capitalisation of the Company up to £300m, 0.8% per annum on the average market capitalisation between £300m and £500m and 0.7% per annum on the average market capitalisation above £500m on the last business day of each calendar month. The basic management fee accrues daily and is payable in arrears in respect of each calendar month. For the purpose of calculating the basic fee, the ‘adjusted market capitalisation’ of the Company is defined as the average daily mid-market price for an ordinary share and C share (when in issue), multiplied by the number of relevant shares in issue, excluding those held by the Company in treasury, on the last business day of the relevant month. In addition, the AIFM is entitled to receive a management fee on any Redemption Pool, as detailed in the Strategic Report above.

As part of an internal reorganisation by the Manager, Premier Portfolio Managers Limited were appointed as Alternative Investment Fund Manager (AIFM) and Manager in place of Miton Trust Managers Limited on 24 April 2020. Premier Portfolio Managers Limited undertake to perform and observe the terms of the existing Investment Management Agreement.

At 31 May 2020 an amount of £232,000 was outstanding and due to Premier Portfolio Managers Limited (2019: £292,000 due to Miton Trust Managers Limited) in respect of management fees.

4 Other Expenses

Year ended
31 May 2020
£000
Year ended
31 May 2019
£000
Fund Administration and Secretarial services 125 122
Auditor’s remuneration for:
Audit of the Group’s financial statements (payable by the Company only) 48 34
Directors’ fees (see the Directors’ Remuneration Report in the full Annual Report) 180 152
Other expenses 488 473
841 781

The audit of the Group's financial statements includes the cost of the audit of DIT Income Services Limited of £3,000 (2019: £2,000), which is paid by the parent Company.

5 Finance Costs

Year ended 31 May 2020 Year ended 31 May 2019
Revenue
£000
Capital
£000
Total
£000
Revenue
£000
Capital
£000
Total
£000
RBSI £20m (2019: £25m) revolving loan facility arrangement fee 5 15 20 16  21 
RBSI £20m (2019: £25m) revolving loan facility non-utilisation fee 23 67 90 25  75  100 
28 82 110 30  91  121 

The Group entered into a revolving loan facility (the “facility”) on 4 October 2019 with The Royal Bank of Scotland International Limited, London branch (“RBS”) for £20m which replacing the previous expired revolving credit facility for £25m. The facility bears interest at the rate of 1.35% over LIBOR on any drawn down balance and a non-utilisation fee of 0.5% on any undrawn balance. The facility is due for renewal in September 2020. The covenants require that borrowings will not at any time exceed 25% of the adjusted portfolio value, being the total portfolio value less the gross market value of each investment which is not a quoted equity freely traded on a recognised investment exchange, and that the net asset value shall at all times be greater than £210m. If the Group breaches any covenant it is required to notify RBS of any default and the steps being taken to remedy it.

The arrangement fee of £20,000 was paid and is amortised over the period of the facility.

The Group has not drawn down this facility during the year (2019: nil) and no amounts have been drawn down at the date of signing this report.

6 Taxation

Year ended
31 May 2020
Year ended
31 May 2019
Revenue 
£000 
Capital 
£000 
Total 
£000 
Revenue 
£000 
Capital 
£000 
Total 
£000 
Prior years recoverable WHT now written off 59  59  17  17 
Overseas withholding tax suffered 67  67  228  228 
Total overseas withholding tax suffered 126  126  245  245 

   

Year ended
31 May 2020
Year ended
31 May 2019
Revenue 
£000 
Capital 
£000 
Total 
£000 
Revenue 
£000 
Capital 
£000 
Total 
£000 
Return on activities before taxation 12,488  (21,556) (9,068) 15,389  (38,924) (23,535)
Theoretical tax at UK corporation tax rate of 19% (2019: 19%) 2,373  (4,096) (1,723) 2,924  (7,396) (4,472)
Effects of:
UK dividends that are not taxable (1,966) (1,966) (2,249) (2,249)
Overseas dividends that are not taxable (530) (530) (703) (703)
Non-deductible investment losses 3,656  3,656  6,865  6,865 
Overseas taxation suffered 67  67  228  228 
Overseas tax – prior year’s recoverable tax written off 59  59  17  17 
Double tax relief expensed in current period -  2  13  13 
Unrelieved expenses 121  440  561  15  531  546 
Actual current tax charge 126  126  245  245 

Factors that may affect future tax charges

At 31 May 2020, the Company had no unprovided deferred tax liabilities (2019: £nil). At that date, based on current estimates and including the accumulation of net allowable losses, the Company had unrelieved losses of £23,135,000 (2019: £20,091,000) that are available to offset future taxable revenue. A deferred tax asset of £4,396,000 (2019: £3,415,000) has not been recognised because the Company is not expected to generate sufficient taxable income in future periods in excess of the available deductible expenses and accordingly, the Company is unlikely to be able to reduce future tax liabilities through the use of existing surplus losses.

The income from the subsidiary subject to taxation was £85,000 (2019: £56,000) and was offset against excess management expenses held by the Company using group relief. In addition, deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an investment trust company under HMRC rules.

7 Return per Share

Ordinary Shares

The return per ordinary share is based on the net loss after taxation of £9,194,000 (2019: loss £23,780,000) and on 378,484,338 (2019: 383,732,171) ordinary shares, being the weighted average number of ordinary shares in issue during the year.

The return per ordinary share detailed above can be further analysed between revenue and capital as follows:

Year ended 31 May 2020 Year ended 31 May 2019
Revenue Capital  Total  Revenue Capital Total
Basic & diluted
Net (loss)/profit (£000) 12,362 (21,556) (9,194) 15,144 (38,924) (23,780)
Weighted average number of ordinary shares in issue 378,484,338  383,732,171 
Return per ordinary share (pence) 3.27 (5.70) (2.43) 3.95 (10.14) (6.19)

The 50,000 Management shares do not participate in the returns of the Company.

8 Dividends per Ordinary Share

Amounts recognised as distributions to equity holders in the year:

Year ended 31 May 2020 Year ended 31 May 2019

£000
pence
per share

£000
pence
per share
In respect of the previous year:
Third interim dividend 3,405 0.90 3,260 0.85
Final dividend 4,161 1.10 3,838 1.00
Special dividend 605 0.16 883 0.23
In respect of the year under review:
First interim dividend 3,215 0.85 3,070 0.80
Second interim dividend 3,405 0.90 3,262 0.85
Dividends distributed during the year 14,791 3.91 14,313 3.73

The Directors have declared a third interim dividend in respect of the year ended 31 May 2020 of 0.90p per ordinary share payable on 28 August 2020 to all shareholders on the register at close of business on 26 June 2020. A final dividend of 1.05p per ordinary share has also been recommended by the Board. Subject to shareholder approval at the forthcoming AGM, this dividend will be payable on 30 November 2020 to shareholders on the register at close of business on 25 September 2020. The ex-dividend date will be 24 September 2020.

The total dividends payable in respect of the financial year for the purposes of the income retention test for Section 1158 of the Corporation Tax Act 2010 are set out below.

Year ended  31 May 2020 
£000 
Year ended 
31 May 2019 
£000 
Revenue available for distribution by way of dividends for the year 12,277  15,088 
First interim dividend 0.85p (2019: 0.80p) per ordinary share (3,215) (3,070)
Second interim dividend 0.90p (2019: 0.85p) per ordinary share (3,405) (3,262)
Declared third interim dividend 0.90p (2019: 0.90p) per ordinary share (3,222) (3,405)
Proposed final dividend of 1.05p (2019: 1.10p) per ordinary share (3,759) (4,161)
Proposed special dividend of 1.05p (2019: 0.16p) per ordinary share (605)
Estimated revenue reserve retained for the year (1,324) 585 

9 Called-Up Share Capital

31 May 2020 31 May 2019
number  £000  number  £000 
Ordinary shares of 0.1p each
Opening balance 383,787,239  384  383,487,239  384 
Issue of ordinary shares 300,000 
Cancellation of ordinary shares (5,498,192) (6)
378,289,047  378  383,787,239  384 

The rights and restrictions attached to shares, together with the capital structure of the Company, are set out above.

Redemption of Ordinary Shares

The Company, which is a closed-ended investment company with an unlimited life, has a redemption facility through which shareholders are entitled to request the redemption of all or part of their holding of ordinary shares on an annual basis on 31 May. As set out in the Articles of Association, the Board may, at its absolute discretion, elect not to operate the annual redemption facility in whole or in part. Accordingly, the ordinary shares have been classified as equity.

The Company received redemption requests for 20,243,942 ordinary shares in respect of the 29 May 2020 Redemption Point. These shares were redeemed and cancelled by the Company with effect from 12 June 2020. All shareholders who validly applied to have shares redeemed received a calculated Redemption Price of 89.76p per share.

Details of the redemption facility are set out in the full Annual Report.

Management Shares

The 50,000 management shares with a nominal value of £1 each were allotted to Miton Group plc on 30 March 2011, the parent company of the Manager. The management shares are non-voting and non-redeemable and, upon a winding-up or on a return of capital of the Company, shall only receive the fixed amount of capital paid up on such shares and shall confer no right to any surplus capital or assets of the Company.

As at 31 May 2020, £12,500 had been paid up (2019: £12,500). The balance is payable on demand.

10 Reserves




2020
Share
premium
account
£000
Capital redemption reserve
£000
Special 
reserve 
£000 
Capital  reserve 
realised 
£000 
Capital 
reserve 
unrealised 
£000 
Revenue 
reserve 
£000 
Opening balance 192,562 - 45,775  84,034  24,965  17,470 
Cancellation of ordinary shares - 6 (5,245)
Net loss on realisation of investments - - (10,256)
Exchange losses on settlements and currency accounts - - (33) - 

Unrealised net decrease in value of investments - - (22,625)
Movement in value of derivative instruments - - 13,234  440 
Management fees/finance costs charged to capital - - (2,316)
Equity dividends paid - - (14,791)
Revenue return on ordinary activities after tax - - 12,362 
Closing balance 192,562 6 40,530  84,663  2,780  15,041 

   




2019
  Share
premium
 account
   000
Capital redemption reserve
£000
Special
reserve
£000
Capital  reserve 
realised 
  £000 
Capital 
reserve 
unrealised 
   000 
Revenue  reserve 
   000 
Opening balance 192,244 - 45,775 74,812  73,111  16,639 
Issue of ordinary shares 318 - -
Net gain on realisation of investments - - - 17,411 
Exchange losses on settlements and currency accounts - - - (48)
Unrealised net decrease in value of investments - - - (50,582)
Movement in value of derivative instruments - - - (5,350) 2,436 
Management fees/finance costs charged to capital - - - (2,791) -
Equity dividends paid - - - - (14,313)
Revenue return on ordinary activities after tax - - - - 15,144 
Closing balance 192,562 - 45,775 84,034  24,965 17,470 

The distributable reserves of the Company are £139,249,000 (2019: £146,379,000).

At a General Meeting of the Company held on 6 April 2011, a resolution was passed approving the cancellation of the Company’s share premium account.

The Court subsequently confirmed this cancellation on 22 February 2012 and an amount of £48,558,000 was transferred from the Company’s share premium account to its special reserve. This amount can be treated as a distributable reserve for all purposes permitted by the Companies Act 2006 (as amended), and will enhance substantially the ability of the Company to meet annual redemption requests and to buy-back its own shares either into treasury or for cancellation.

11 Net Asset Value per Ordinary Share

The net asset value per ordinary share and the net asset values attributable at the year end were as follows:

Net asset value
per share
31 May 2020
pence
Net assets
attributable
31 May 2020
£000
Net asset value
per share
31 May 2019
pence
Net assets
attributable
31 May 2019
£000
Opening balance
- Basic and diluted
88.82 336,010 95.17 365,240

Net asset value per ordinary share is based on net assets at the year end and 378,289,047 ordinary shares (2019: 383,787,239), being the number of ordinary shares in issue at the year end.

The net asset value of £1 (2019: £1) per management share is based on net assets at the year-end of £50,000 (2019: £50,000) and 50,000 (2019: 50,000) management shares. The shareholders have no right to any surplus capital or assets of the Company.

12 Investments

Group and Company 31 May 2020
£000
31 May 2019
£000
Investment portfolio summary:
Opening book cost 300,843 306,680
Opening investment holding gains 25,405 75,987
Total investments classified at fair value 326,248 382,667

Analysis of investment portfolio movements

Opening valuation 326,248  382,667 
Movements in the period:
Purchases at cost 140,596  99,709 
Sales - proceeds (123,565) (122,957)
   - (losses)/gains on sales (10,256) 17,411 
Movement in investment holding gains (22,625) (50,582)
Closing fair value 310,398  326,248 
Closing book cost 307,618  300,843 
Closing investment holding gains 2,780  25,405 
Total closing investments designated at fair value 310,398  326,248 

   

Year ended
31 May 2020
£000
Year ended
31 May 2019
£000
Transaction costs:
Costs on acquisitions 554 352
Costs on disposals 82 119
636 471

   

Year ended 
31 May 2020 
£000 
Year ended 
31 May 2019 
£000 
Analysis of capital gains/(losses)
Realised (losses)/gains on sales (10,256) 17,411 
Movement in unrealised gains (22,625) (50,582)
(32,881) (33,171)

Fair Value Hierarchy

Financial assets of the Group are carried in the Balance Sheet at their fair value or approximation of fair value. The fair value is the amount at which the asset could be sold in an ordinary transaction between market participants, at the measurement date, other than a forced or liquidation sale. The Group measures fair values using the following hierarchy that reflects the significance of the inputs used in making the measurements.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset as follows:

Level 1 – Valued using quoted prices, unadjusted in active markets for identical assets and liabilities.

Level 2 – Valued by reference to valuation techniques using observable inputs for the asset or liability other than quoted prices included in level 1.

Level 3 – Valued by reference to valuation techniques using inputs that are not based on observable market data for the asset or liability.

Assessing the significance of a particular input requires judgement, considering factors specific to the asset or liability.

The table below sets out the fair value measurement of financial assets and liabilities in accordance with the fair value hierarchy.

Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Financial assets at fair value through profit or loss at 31 May 2020
Equity investments 304,590 1,420 - 306,010
Derivative contracts - - - -
Fixed interest bearing securities - 4,388 - 4,388
304,590 5,808 - 310,398

   

Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Financial assets at fair value through profit or loss at 31 May 2019
Equity Investments 318,940 - - 318,940
Derivative contracts 6,313 - - 6,313
Fixed interest bearing securities 1,769 5,539 - 7,308
327,022 5,539 - 332,561

The Level 2 investments are at fair value calculated using observable inputs. This fair value is calculated using:

  • the observable fair value on an inactive market;
  • an intrinsic value above cost, allowing for the conversion value of the underlying, actively traded bid price where applicable; and
  • where the unlisted convertible debt conversion value was not greater than par value (being ‘out of the money’) then held at par value being an approximation of fair value.

The fair value of Level 3 investments are based on discounted anticipated future cash returns.

Year ended 
31 May 2020 
Level 3 
£000 
Year ended 
31 May 2019 
Level 3 
£000 
Opening fair value investments 4,404 
Purchase at cost
Sale proceeds (364)
Realised gains on sales 16 
Transfer from Level 3 to Level 2 (4,056)
Movement in unrealised investment holding gains
Closing fair value of investments

Trading Income

The Company’s subsidiary completes trading transactions. The value of assets held by the subsidiary as at 31 May 2020 was £nil (2019: £nil). The difference between the sale and purchase of assets is trading income recognised in the Income Statement.

13. Derivative Contracts

Listed Put options at fair value through profit or loss at 31 May 2019 Year ended 
31 May 2020 
£000 
Year ended 
31 May 2019 
£000 
Opening book cost 6,753  7,254 
Opening investment holding loss (440) (2,876)
Opening total investments classified at fair value 6,313  4,378 
Analysis of investment portfolio movements
Opening fair value 6,313  4,378 
Movements in the period:
Purchases at cost 6,753 
Sales – proceeds (19,987) (1,904)
– gains/(losses) on sales 13,234  (5,350)
Movement in unrealised loss 440  2,436 
Closing fair valuation 6,313 
Closing book cost 6,753 
Closing unrealised loss (440)
Closing fair value 6,313 

   

At
31 May 2020
£000
At
31 May 2019
£000
Transaction costs:
Cost on acquisitions - 4
Costs on disposals 4 4
4 8

   

At 
31 May 2020 
£000 
At 
31 May 2019 
£000 
Analysis of capital losses on options
Realised gains/(losses) on sales 13,234 (5,350)
Movement in unrealised losses 440 2,436 
13,674 (2,914)

Derivative contracts

Typically, derivative contracts serve as components of the Group’s investment strategy and are utilised primarily to structure and hedge investments, to enhance performance and reduce risk to the Company (the Company does not designate any derivative as a hedging instrument for hedge accounting purposes). The derivative contracts that the Group may hold from time to time or issue include: index-linked notes, contracts for differences, covered options and other equity-related derivative instruments.

Derivatives often reflect, at their inception, only a mutual exchange of promises with little or no transfer of tangible consideration. However, these instruments can involve a high degree of leverage and are very volatile. A relatively small movement in the underlying value of a derivative contract may have a significant impact on the profit and loss and net assets of the Group.

The Group’s investment objective sets limits on investments in derivatives with a high risk profile. The Manager is instructed to closely monitor the Group’s exposure under derivative contracts and any use of the derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Group’s direct investments.

The Group purchases either Put or Call options through regulated exchanges and OTC markets. Options purchased by the Group provide the Group with the opportunity to purchase (Call options) or sell (Put options) the underlying asset at an agreed-upon value either on or before the expiration of the option. The Group is exposed to credit risk on purchased options only to the extent of their carrying value, which is their fair value.

Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specific amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period.

The Company held no derivative positions as at year end.

14 Substantial Share Interests

The Company has notified interests in 3% or more of the voting rights of 18 (2019:14) investee companies (none of which are closed-end investment funds). The Board does not consider any of the Company’s other equity investments to be individually material in the context of the financial statements.

15 Investment in Subsidiary

The Company owns the whole of the issued ordinary share capital (£1) of DIT Income Services Limited, an investment dealing company registered in England and Wales. The registered office of the subsidiary is Beaufort House, 51 New North Road, Exeter, Devon EX4 4EP. The subsidiary is held at cost of £1 and has provided loans to the Company amounting to £985,000 at 31 May 2020 (2019: £900,000).

16 Trade and Other Receivables

Group Company
31 May 2020
£000
31 May 2019
£000
31 May 2020
£000
31 May 2019
£000
Amounts due from brokers 399 3,193 399 3,193
Dividends receivable 1,643 1,730 1,643 1,730
Accrued income 77 83 77 83
Taxation recoverable 508 499 508 499
Prepayments and other debtors 90 82 90 82
2,717 5,587 2,717 5,587

17 Trade and Other Payables

Group Company
31 May 2020
£000
31 May 2019
£000
31 May 2020
£000
31 May 2019
£000
Amounts due to brokers 2,551 - 2,551 -
Amounts due to subsidiary - - 985 900
Other creditors 370 403 370 403
2,921 403 3,906 1,303

18 Capital Commitments and Contingent Liabilities

At 31 May 2020, there was one outstanding commitment of £1,420,000 (2019: £nil), and no contingent liabilities (2019: £nil).

19 Analysis of Financial Assets and Liabilities

Investment Objective and Policy

The Group’s investment objective and policy are detailed above.

The Group’s investing activities in pursuit of its investment objective involve certain inherent risks.

The Group’s financial instruments comprise:

  • shares and debt securities held in accordance with the Group’s investment objective and policies;
  • derivative instruments for efficient portfolio management, gearing and investment purposes;
  • cash, liquid resources and short-term debtors and creditors that arise from its operations; and
  • current asset investments held by its subsidiary.

The risks identified arising from the Group’s financial instruments are market risk (which comprises market price risk, interest rate risk and foreign currency risk), liquidity risk and credit and counterparty risk. The Group may enter into derivative contracts to manage risk. The Board reviews and agrees policies for managing each of these risks, which are summarised below. These policies have remained unchanged since the beginning of the accounting year.

Market Risk

Market risk arises mainly from uncertainty about future prices of financial instruments used in the Group’s business. It represents the potential loss the Group might suffer through holding market positions by way of price movements, interest rate movements and exchange rate movements. The Manager assesses the exposure to market risk when making each investment decision and these risks are monitored by the Manager on a regular basis and the Board at quarterly meetings with the Manager.

Market price risk

Market price risk (i.e. changes in market prices other than those arising from currency risk or interest rate risk) may affect the value of investments.

The Board manages the risks inherent in the investment portfolio by ensuring full and timely reporting of relevant information from the Manager. Investment performance and exposure are reviewed at each Board meeting.

The Group’s exposure to other changes in market prices as at 31 May 2020 on its equity and debt investments and held at fair value through profit or loss was £310,398,000 (2019: £332,561,000).

A 10% increase in the market value of its investments at 31 May 2020 would have increased net assets attributable to shareholders by £31,040,000 (2019: £33,256,000). An equal change in the opposite direction would have decreased the net assets and net profit available to shareholders by an equal and opposite amount.

Interest rate risk

Interest rate movements may affect the level of income receivable on cash deposits and payable on its revolving credit facility. The Group’s financial assets and liabilities, excluding short-term debtors and creditors, may include investment in fixed interest securities, such as UK corporate debt stock, whose fair value may be affected by movements in interest rates. The majority of the Group’s financial assets and liabilities, however, are non-interest bearing. As a result, the Group’s financial assets and liabilities are not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. There was limited exposure to interest bearing liabilities during the year ended 31 May 2020 (2019: same).

The possible effects on the fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions. The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions.

As detailed above, at 31 May 2020 the Company held three (2019: five) fixed income securities representing 1.3% of the total investment portfolio (2019: 2.0%).

The interest rate profile of the Group (excluding short-term debtors and creditors) was as follows:

As at 31 May 2020 Weighted
average
interest
rate
%


Floating
rate

£000


Fixed
rate
£000
Assets and liabilities
Fixed interest securities 8.00 - 4,388
Cash at bank - 25,816 -
25,816 4,388

   

As at 31 May 2019 Weighted
average
interest
rate
%


Floating
rate
£000



Fixed rate
£000
Assets and liabilities
Fixed interest securities 7.90 - 7,308
Cash at bank - 27,495 -
27,495 7,308

The weighted average interest rate is based on the current yield of each asset, weighted by its market value.

The weighted average fixed interest rate is based on the current yield of each asset, weighted by its current market value. The maturity dates and nominal interest rates on these investments held at fair value through profit or loss are shown in the portfolio information above. The weighted average years to maturity are 1.69 years (2019: 2.16 years).

The floating rate assets consist of cash deposits on call earning interest at the prevailing market rates.

The interest rate risk sensitivity of the Group on its floating rate assets and liabilities is given below:

If interest rates had been 50 basis points higher or lower and all other variables were held constant, the Group’s net assets and profit for the year ended 31 May 2020 would increase/decrease by £129,000 (2019: increase/decrease by £137,000). This is attributable to the Group’s exposure to interest rates on its floating rate cash balances and bank overdraft as at the year ended 31 May 2020, and is not considered by the Directors to be representative for the year as a whole. If there was a fall in interest rates it would potentially impact the Company as above, by turning positive interest to negative interest.

Foreign currency risk

Although the Company’s performance is measured in sterling, a proportion of the Group’s assets may be either denominated in other currencies or are in investments with currency exposure. Any income denominated in a foreign currency is converted into sterling upon receipt. At the Balance Sheet date, all the Group’s assets were denominated in sterling and accordingly the only currency exposure the Group has is through the trading activities of its investee companies.

Liquidity Risk

Liquidity risk is not considered to be significant as the Group’s assets primarily comprise cash and readily realisable securities, which can under normal conditions be sold to meet funding commitments if necessary. They may, however, be difficult to realise in adverse market conditions. The Group can achieve short-term flexibility by the use of its overdraft facility.

The maturity profile of the Group’s financial liabilities of £370,000 (2019: £403,000) are all due in one year or less.

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Group suffering a loss.

The maximum exposure to credit risk as at 31 May 2020 was £28,533,000 (2019: £39,395,000). The calculation is based on the Group’s credit risk exposure as at 31 May 2020.

Group’s listed investments are held on its behalf by Bank of New York Mellon acting as the Group’s custodian. The Depositary will ensure that all accounts are segregated. Bankruptcy or insolvency of the custodian may cause the Group’s rights with respect to securities held by the custodian to be delayed. The Board monitors the Group’s risk by reviewing the custodian’s internal controls report.

Where the Manager makes an investment in a bond or other security with credit risk, that credit risk is assessed to minimise the risk to the Group of default.

Investment transactions are carried out with a number of brokers whose creditworthiness is reviewed by the Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Group’s custodian bank ensures that the counterparty to any transaction entered into by the Group has delivered on its obligations before any transfer of cash or securities away from the Group is completed.

Cash is only held at banks that have been identified by the Board as reputable and of high credit quality.

None of the Group’s assets are past due and the adoption of the expected credit loss model for impairment under IFRS 9 has not had a material impact on the Company.

Derivatives

The Manager may use derivative instruments in order to ‘hedge’ the market risk of part of the portfolio. The Manager reviews the risks associated with individual investments and, where they believe it appropriate, may use derivatives to mitigate the risk of adverse market (or currency) movements. The Manager discusses regularly the hedging strategy with the Board.

Capital Management Policies

The Company’s capital management objectives are:

  • to ensure that it will be able to continue as a going concern; and
  • to maximise the income and capital return over the long-term to its equity shareholders through an appropriate balance of equity capital and ‘debt’.

As stated in the investment policy, the Company has authority to borrow up to 15% of net asset value through a mixture of bank facilities and certain derivative instruments. There were no borrowings as at 31 May 2020 (2019: £nil). Also, as a public company the minimum share capital is £50,000.

2020 
£000 
2019 
£000 
The Company’s capital at 31 May comprised:
Debt:
Bank loan facility
Equity:
Equity share capital 434  434 
Retained earnings and other reserves 335,576  364,806 
Total shareholders’ funds 336,010  365,240 
Debt as a % of net assets 0.00% 0.00%

The Board, with the assistance of the Manager, monitors and reviews the broad structure of the Company’s capital on an ongoing basis. This review includes:

  • the planned level of gearing, which takes into account the Manager’s view of the market;
  • the need to buy back shares for cancellation or treasury, which takes account of the difference between the net asset value per share and the share price (i.e. the level of share price discount or premium);
  • the need for new issues of equity shares; and
  • the extent to which revenue in excess of that which is required to be distributed should be retained.

The Company’s objectives, policies and processes for managing capital have remained unchanged since its launch.

20 Transactions with the Manager and Related Parties

The amounts paid to the Manager pursuant to the Management Agreement are disclosed in note 3. Management fees for the year amounted to £2,978,000 (2019: £3,600,000).

As at the year end, the following amounts were outstanding in respect of management fees: £232,000 (2019: £292,000).

Fees paid to the Company’s Directors are disclosed in the Directors' Remuneration Report in the full Annual Report. At the year end, there were no outstanding fees payable to Directors (2019: £nil).

There were no other identifiable related parties at the year end.

2 1 Post Balance Sheet Events

As detailed in note 9, the Company received redemption requests for 20,243,942 ordinary shares in respect of the 29 May 2020 Redemption Point. These shares were redeemed and cancelled by the Company with effect from 12 June 2020.

GLOSSARY

AIC

The Association of Investment Companies.

AIM

The Alternative Investment Market is a sub-market of the London Stock Exchange. It allows smaller companies to float shares with a more flexible regulatory system than applicable to the main market.

Alternative Performance Measure (“APM”)

An APM is a numerical measure of the Company’s current, historical or future financial performance, financial position or cash flows, other than a financial measure defined or specified in the applicable financial framework.

The Company uses a number of APMs to provide information in order to assist the Board and Manager in monitoring the Company in order for them to meet the objectives of the Company including the management of risk. These consist of, but are not limited to, key performance and financial performance indicators set out in the various relevant parts of the Report.

Annual General Meeting (“AGM”)

All public companies have an AGM every year, and this is the opportunity for the shareholders to confirm their approval of the annual report and financial statements, the annual dividend and the appointment of the Directors and Auditor. It is also a good time for shareholders to meet the non-executive Directors. The Company’s AGM will be held on Wednesday, 14 October 2020 at 11.30 am at the offices of Premier Miton, Eastgate Court, High Street, Guildhall, GU1 3DE. A presentation by the fund managers on the current position of the Company’s portfolio and some thoughts on the market outlook will be made available on the Company's website before 12 October 2020.

Discount/Premium

If the share price of an investment trust is lower than the NAV per share, the shares are said to be trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage of the NAV per share. If the share price is higher than the NAV per share, this situation is called a premium.


Premium/(Discount) Calculation
Page 31 May 
2020 
31 May  2019 
Closing NAV per share (p) 6 88.82  95.17  (a)
Closing share price (p) 6 84.00  89.00   (b)
(Discount)/Premium (c = ((b - a)/a) x 100 (%) 6 (5.43) (6.48)  (c)

The discount/premium and performance is calculated in accordance with guidelines issued by the AIC. The discount/premium is calculated using the NAV per share inclusive of accrued income with debt at market value.

Dividend Yield

The annual dividend expressed as a percentage of the mid market share price. This financial ratio shows how much an investment pays out in dividends relative to its stock price. The dividends are based upon historic dividend rates and announcements by the investment company. The dividend yield indicates the anticipated future cashflows from the investment contributing to the income of the Group.

Financial Conduct Authority (“FCA”)

This regulator oversees the fund management industry, including the operation of the Company.

Financial Reporting Council (“FRC”)

The FRC regulates UK auditors and provides guidance to accountants with the aim of promoting better transparency and integrity in the annual reports of quoted businesses.

Gearing

Gearing refers to the ratio of the Company’s debt to its equity capital. The Company may borrow money to invest in additional investments for its portfolio. If the Company’s assets grow, the shareholders’ assets grow proportionately because the debt remains the same. If the value of the Company’s assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets.

Group

The Company and its subsidiary; DIT Income Services Limited.

Growth Stock

A stock where the earnings are expected to grow at an above-average rate, leading to a faster than average growing share price. Growth stocks do not usually pay a significant dividend.

International Financial Reporting Standards (“IFRS”)

Generally Accepted Accounting Principles (“GAAP”) are a common set of accounting principles, standards and procedures that companies follow when they compile their financial statements. GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. This enables the financial results of companies to be determined on a common basis so they are able to be compared.

In the UK, company accounts must be prepared in accordance with applicable company law, this being the Companies Act 2006, which recognises GAAP. IFRS are standards issued by the International Accounting Standards Board (“IASB”), approved for implementation by the European Union to provide a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. These were previously International Accounting Standards (“IAS”) maintained by the IASB. The Company adopted IFRS with the accounting policies of the Company set out in the financial statements.

Key Performance Indicators (“KPIs”)

KPIs are a short list of corporate attributes that are used to assess the general progress of the business and are outlined in the Strategic Report above.

Net Asset Value per Ordinary Share (“NAV”)

The NAV is shareholders’ funds expressed as an amount per individual share. Shareholders’ funds are the total value of all of the Company’s assets, at their current market value, having deducted all liabilities and prior charges at their par value, or at their asset value as appropriate. The total NAV per share is calculated by dividing the NAV by the number of ordinary shares in issue excluding treasury shares.

Ongoing Charges

As recommended by the AIC in its guidance, ongoing charges are the Company’s annualised revenue and capital 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.



Ongoing Charges Calculation
Page 31 May 
  2020 
£000 
31 May  2019 
£000 
Management fee 61 2,978   3,600 
Other administrative expenses 61 840  781 
Less one time costs (45) (42)
Total management fee and other administrative expenses 3,773  4,339  (a)
Average net assets in the year 346,694  374,922  (b)
Ongoing charges (c = a/b x 100) (%) 1.09  1.16  (c)

Peer Group

Diverse is part of the AIC’s UK Equity Income Investment Trust sector. The trusts in this universe are defined as trusts whose investment objective is to achieve a total return for shareholders through both capital and dividend growth. Typically, the funds will have a yield on the underlying portfolio ranging between 110% and 175% of that of the FTSE All-Share Index. They will also have at least 80% of their assets in UK listed securities.

Put Option

Put options are most commonly used in the stock market to protect against the decline of the price of a stock below a specified price likened to purchasing a form of financial insurance. An owner of a Put option can collect a financial benefit after an adverse event, with the scale of the benefit proportionate to the setback in the market and the remaining term of the cover.

Senior Independent Director (“SID”)

The SID is a non-executive director who can be contacted by investors to discuss a matter of governance when it concerns the Chairman and the normal practice cannot be followed. The Company's SID is currently Andrew Bell and he will be succeeded by Calum Thomson when he takes the position of Chairman of the Board.

Total Assets

Total assets include investments, cash, current assets and all other assets. An asset is an economic resource, being anything tangible or intangible that can be owned or controlled to produce value and to produce positive economic value. Assets represent the value of ownership that can be converted into cash. The total assets less all liabilities will be equivalent to total shareholders’ funds.

Total Return – NAV and Share Price Returns

Total return statistics enable the investor to make performance comparisons between investment trusts with different dividend policies. The total return measures the combined effect of any dividends paid, together with the rise or fall in the share price or NAV. This is calculated by the movement in the share price or NAV plus dividend income reinvested by the Company at the prevailing NAV.


NAV Total Return
Page 31 May 
  2020 
31 May 
2019 
Closing NAV per share (p) 6 88.82  95.17 
Add back total dividends paid in the year ended 31 May 2020 (2019) (p) 74 3.91  3.73 
Adjusted closing NAV (p) 92.73  98.90  (a)
Opening NAV per share (p) 6 95.17  105.09  (b)
NAV total return unadjusted
(c = ((a-b)/b) x 100) (%)
(2.6) (5.9) (c)

NAV total return adjusted %*
(2.5) (5.9)

   


Share Price Total Return
Page 31 May 
2020 
31 May 
2019 

Closing share price (p)
6 84.00  89.00     
 
Add back total dividends paid in the year ended 31 May 2020 (2019) (p) 74 3.91  3.73 
Adjusted closing share price (p) 87.91  92.73  (a)
Opening share price (p) 6 89.00  107.00  (b)
Share price total return unadjusted
(c = ((a-b)/b) x 100) (%)
(1.2) (13.3)
(c)

Share price total return adjusted %*
(1.2) (13.6)

* Based on NAV/share price movements and dividends being reinvested at the relevant cum dividend NAV/share price during the year. Where the dividend is invested and the NAV/share price falls, this will further reduce the return or, if it rises, any increase will be greater. The source is Morningstar who have calculated the return on an industry comparative basis.

Volatility

The term volatility describes how much and how quickly the share price or net asset value of an investment has tended to change in the past. Those investments with the greatest movement in their share prices are known as having high volatility, whereas those with a narrow range of change are known as having low volatility.

Yield Stock

Yield stocks pay above-average dividends to shareholders. If the dividend grows, and the yield on the share remains constant, the share price will increase. Companies which grow their dividends faster than average are capable of delivering faster share price growth.

ANNUAL GENERAL MEETING

The stated intention is to hold this year’s AGM on Wednesday, 14 October 2020 at 11.30 am, at the offices of Premier Miton, Eastgate Court, High Street, Guildford, GU1 3DE. However, due to the continuing COVID-19 pandemic at the date of this report it is uncertain whether, under Government guidance, larger gatherings will be permitted on the date of the AGM. New legislation set out in Schedule 14 of the Corporate Insolvency and Governance Act, contains temporary provisions regarding AGM arrangements and it is currently uncertain whether these temporary provisions will be extended past 30 September 2020. The Company is making provisions for all eventualities and will keep shareholders updated on any material developments in the usual way, via RNS.

Further details of this year’s AGM arrangements are set out in the AGM notice contained within the full Annual Report.

NATIONAL STORAGE MECHANISM

A copy of the Annual Report and Accounts will be submitted shortly to the National Storage  Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at:

https://data.fca.org.uk/#/nsm/nationalstoragemechanism

ENDS

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

LEI: 2138005QFXYHJM551U45


a d v e r t i s e m e n t