‘Greatest opportunity for 30 years’ after income trust's 16% slump

UK income investment trust Diverse Income Trust reported notable underperformance for the 12 months to 31 May 2023, with its net asset value (NAV) falling 16.2% compared with a 0.4% drop for the Numis All-Share index.

Shares fell 15.37%, reflecting a slightly narrower discount at the end of May 2023 compared with a year earlier. This was some way behind the 0.8% gain for the typical UK Equity Income investment trust.

Diverse Income, which is a member of interactive investor’s Super 60 list of recommended funds, increased its dividend 3.8% on the previous financial year. It currently yields 4.8%, generated by owning dividend-paying companies from a wide range of UK companies.

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Currently, one-third of the portfolio is invested in AIM shares, one-fifth in FTSE Small Cap shares, with the rest in FTSE 100 and FTSE 250 companies.

Its investment proposition is that a multi-cap approach to income investing can produce a reliable and diversified income stream for shareholders.

Despite the underperformance, fund managers Gervais Williams and Martin Turner said that prospects for the trust’s strategy are the greatest they have been for 30 years.

They said: “The bottom line is that we believe the Diverse Income Trust’s strategy now has the potential not only to outperform the mainstream indices in the UK, as it has done since issue, but also to outperform international markets, as the UK stock market itself outperforms.

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“When the asset class in question (UK-quoted multicap equity income stocks) starts at a particularly low valuation, along with very modest institutional allocations, such favourable trends can persist over very long time periods.”

Moreover, the fund managers argue that investing in smaller companies has typically rewarded investors.

Since 1955, they calculate that UK-listed companies in the bottom 10% in market capitalisation terms have generated much higher returns than those in all other size bands.

“If this factor is combined with those that stand on overlooked valuations as they
often are when they stand on premium yields, then their returns have been even greater,” they add.

While falling nearly 16% more than its benchmark, Williams and Turner argue that the poor returns were not due to their companies struggling, but rather the market punishing smaller companies’ shares.

They said: “When the numerous dividend cuts announced during 2020 are included in the analysis, the trust’s revenue per share has recovered following the setback in 2020, whereas the UK’s stream of dividends remains below previous highs.

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“In short, we ascribe the main reason for the underperformance of UK mid and small cap equity income share prices relative to their larger comparatives over the last two years to a decline in their valuation rather than to a period of inferior trading performance and dividends.”

Longer term performance is stronger for the trust. Since listing in April 2011, shares have delivered a total return of 175% compared to 89.4% for the Numis All Share Index and 146.5% for its equity income investment trust peer group.