The Diverse Income Trust (DIVI) aims to generate a good and growing level of income, as well as capital gains over the long term. It is not constrained by benchmarks and has a wide opportunity set across the market capitalisation spectrum to find high-quality, resilient companies that can sustain dividend growth over the long term. The managers, Gervais Williams and Martin Turner, have a small-cap bias and over two-thirds of the portfolio is outside of the FTSE 350 index. Since its inception in April 2011, the trust has delivered an annualised NAV total return of 12% and consistent growth in its regular dividend. Performance in more recent years has lagged the FTSE All-Share index, which the managers believe reflects small-cap and value stocks being overlooked, and they are finding superior investment opportunities in this segment of the UK equity market.
UK equities are out of favour and, according to the Bank of America Merrill Lynch survey of global fund managers, allocations are well below even the levels of 2008 and 2009 when the UK faced a banking crisis. Small-cap equities have lagged the mainstream indices and may have stronger recovery potential over the long term.
Unconstrained multi-cap strategy offers a wider investment opportunity set and achieves greater diversification across sectors that are not represented in mainstream indices. The managers favour small-cap value stocks, which they believe often have superior return potential and low correlations with mainstream markets. The managers are mindful of downside risk, reflected in quality holdings and a put option to help protect the portfolio from a sharp fall in the FTSE 100 index. In the event of a major UK equity market setback, DIVI has an unused £25m loan facility, which would enable it to invest should share prices become unjustifiably depressed, without the need to sell existing holdings.
At 31 March, DIVI traded on a 2.0% discount to cum-income NAV, which is wider than its three-year average discount of 0.4%. The trust typically trades close to its NAV, and the board is committed to manage the discount, utilising an annual redemption facility and its ability to issues new shares to meet supply and demand requirements.