Diverse Income Trust: Consistently Trading At A premium

Diverse income with downside protection
The Diverse Income Trust’s (DIVI) multi-cap portfolio has provided strong absolute performance over the past twelve months, exceeding that of the FTSE All-Share, the FTSE 350 High Yield and its UK growth and income peer group (see page 6). Following five years of strong market appreciation, the cost of market protection has fallen to the levels seen around 2005-07. Therefore, a FTSE 100 put option, which covers approximately one third of DIVI’s portfolio, was purchased on 1 November 2013 with an overall cost of c 1.6% of NAV (see page 4). This strategy has, in the manager’s view, lessened the need to hold a precautionary cash balance through the coming dividend season, thereby enhancing the potential for dividend payments to shareholders.

Investment strategy: Multi-cap UK equity portfolio
DIVI is a UK growth and income investment trust investing in UK-quoted companies with good and growing dividends and a strategy that is genuinely different from its peers. The majority of trusts in the sector build portfolios around large, liquid, high-yielding stocks; hence a relatively small number of high yielding FTSE 100 stocks can be common holdings. The fund is unusual in having around two thirds of the portfolio invested in small- and micro-cap stocks, with the associated risks diversified over a portfolio of c 130 holdings. While DIVI’s yield is lower than most of its sector peers, the manager believes there is more potential for earnings and dividend growth within the fund, with positive implications for total returns.

Outlook: Sentiment improving? Valuations expanding
Generally improving economic indicators and accommodative monetary policy have contributed to equity market strength, with the FTSE All-Share returning 19.8% during the last 12 months. Although macro risks persist and markets have fluctuated in reaction to talk of tapering, UK smaller companies, where DIVI is overweight, have generally provided strong performance (the FTSE Small Cap Index has returned 35.6%). Price rises have broadly outpaced earnings increases, so the broad UK market and UK small-cap equities are not as cheap as they have been, with valuation measures more comparable to 10-year averages.

Valuation: Consistently trading at a premium
DIVI has predominantly traded at a premium since its launch (April 2011) and the current cum fair premium of 1.6% is comparable to its average during the last year of 2.9%. The liquidity of DIVI’s shares has also been enhanced following the merger with [the £82m] Miton Income Opportunities Trust. The persistence of the premium can be attributed to DIVI’s performance and investors search for yield as well as its risk adjusted return.

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