Multi-cap income with small-cap growth prospects
Diverse Inc (LONDON:DIVI) differs from other UK Equity Income Trusts though its policy of investing in a wider universe of UK quoted stocks. Managers Gervais Williams and Martin Turner focus on those companies with the greatest potential dividend growth, since they believe that this will ultimately lead to the best returns. Currently this policy has led to only 35% or so of the portfolio being invested in the conventional large/mid-cap universe. In contrast many smaller stocks are growing their dividends rapidly, and the managers believe markets are now entering another period of smaller company outperformance. The DIVI strategy has delivered strong performance since launch in 2011.
Investment strategy: Sustainable income growth
DIVI invests across the market cap spectrum (with a bias to smaller companies) to achieve an attractive and growing dividend income with the potential for long-term capital growth. The investment process is based on extensive company meetings and financial analysis and seeks companies with five key attributes: prospects for rising turnover; sustainable corporate margins; strong management, healthy balance sheets (many holdings have net cash and none is over-geared); and share prices that reflect low expectations. The portfolio yields around 3.8% currently, though this does include an element of special dividend payments that will vary in future years.
Market outlook: Near-term volatility to be expected
UK equities have performed strongly year to date, with even the long out-of-favour FTSE AIM All-Share index achieving a total return of 7.5% from 1 January to 5 May, and the FTSE 100 reaching new all-time highs. However, with P/E valuations for the FTSE All-Share some way above their 10-year average, and with uncertainty around global economic growth, near-term volatility is likely. DIVI currently holds a put option on the FTSE 100 covering approximately one-third of the portfolio that would increase in value if markets were to suffer a major setback.
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