Manager Commentary

Please read in conjunction with the Performance section above.

30 June 2020Gervais Williams & Martin Turner

The NAV of the Diverse Income Trust was up 1.06% over the month.

During June we continued to see opportunities to top up various overlooked smaller company income holdings, albeit that we needed to remain confident in their prospects. A good example is K3 Capital that carries out corporate finance services for the very smallest private transactions. Although transactions slowed due to COVID the business reduced its costs to keep itself profitable and is now trading strongly. During June it announced a transaction that is anticipated to enhance its growth rate going forward, so we expect its dividend yield to continue to grow well from the 7% estimated yield.

Although stock markets have recovered well, we remain concerned that the underlying economic recovery might be more uneven. The trust’s premium return over the long term has been mainly driven by successful stock selection and an emphasis on quoted companies with resilient balance sheets, and hence stable long-term dividend prospects. The more numerous holdings in the portfolio have helped to diversity risk. We continue to believe this will deliver more value in the future.

With most asset allocators reducing their investments in the UK after the Brexit vote along with the added uncertainty, the valuation of the UK market appears to have fallen behind others. Overlaying this, many smaller companies are standing on valuations that are somewhat behind the majors. Last, the trust’s share price itself has not fully kept up with its outperformance recently. Overall, we believe the trust’s share price remains well placed for a period of performance catch-up.