The Diverse Income Trust

2012 was a successful year for The Diverse Income Trust (DIVI), as, in total return terms, its share price rose by 39.1% vs 12.3% for the FTSE All-Share Index. Even in NAV terms DIVI was the best performing UK growth and income investment company (average 18.8%) last year. Over the course of its first accounting period, DIVI declared dividends of 2.19p per share, equivalent to 2.02p annualised or just over the 4% yield on the 50p offer price forecast at the time of launch. On the back of this good performance, DIVI has just completed its second C share issue. Shareholders will benefit over time, as the larger asset base dilutes fixed overheads and liquidity in DIVI’s shares improves. Later in 2013, with the improved liquidity and a market cap in excess of £100m, DIVI should qualify it for inclusion in the FTSE All-Share Index making it more appealing to a wider spread of investors.

Investment Strategy: Diversified UK Portfolio
DIVI is a UK growth and income investment trust investing in UK quoted companies with good and growing dividends. However, its investment strategy is genuinely different from its peers. DIVI invests without reference to any index benchmark and places great emphasis on diversifying its portfolio. While most other investment managers in the sector weight their portfolios toward the largest higher-yielding stocks in the UK market, increasing their stock-specific risk, DIVI moves down the market cap spectrum, mitigating the increased liquidity risk by operating with a diversified portfolio. DIVI’s portfolio also has exposure to a wider spread of industries. The corollary of this is that DIVI’s portfolio can have greater exposure to non-FTSE 100 constituents than those of its peer group and performance can differ markedly from the usual UK benchmarks.

Sector Outlook: Equity Income Still In Demand
There was no let-up in investors’ demand for income in 2012 and, increasingly, they seem to be happy to source this from smaller companies. As long as managers’ portfolios are positioned in stocks that can sustain or even grow dividends despite the general economic malaise, the sector could continue to do well in 2013 and beyond.

Valuation: Premium Rating
DIVI has traded at a premium for most of its life and currently is trading on a premium of 5.9%. Arguably, the persistence of the premium could reflect investors’ demand for equity income in the current economic environment and DIVI’s attractive performance record relative to its peers. It is also underpinned by DIVI’s commitment, subject to the board’s discretion, to offer shareholders a chance each year to sell all or part of their holding at NAV.