Diverse Income Trust NAV total return to shareholders of 38.4%

Diverse Income Trust plc (LON:DIVI) has presented the Annual Financial Report for the year ended 31 May 2021. The full Annual Report and Accounts can be accessed via the Company’s website or by contacting the Company Secretary on 01392 477500.

STRATEGIC REPORT

RESULTS FOR THE YEAR TO 31 MAY 2021

  • NAV total return* to shareholders of 38.4% This includes the increase in NAV, plus the dividends paid during the year and compares with an increase in the FTSE All-Share Index of 23.1% on a total return basis over the year to 31 May 2021.
  • Over the year to 31 May 2021, the movement in the Company’s NAV* was +33.2% This compares with the FTSE All-Share Index that increased 19.4%.
  • 3.75p of ordinary dividends for the year The three interim dividends and the proposed final dividend for the year amount to 3.75p, compared with 3.70p in the previous year, an increase of 1.4%.
  • Share price total return* to shareholders of 47.6% The share price total return was 47.6%, boosted by the share price re-rating from a discount to a premium to NAV.
  • Revenue reserves were £15.2m (2020: £15.0m) The Company’s revenue return after taxation was £13.4m, which compares with dividends distributed to shareholders during the year of £14.8m. At the year end £15.2m of revenue reserves remain available to smooth forthcoming dividend distributions to shareholders.
31 May 202131 May 2020Change
NAV per ordinary share118.31p88.82p33.2%
Ordinary share price (mid)119.00p84.00p41.7%
Premium/(discount) to NAV*0.58%(5.43%)
Revenue return per ordinary share3.73p3.27p
Dividends per ordinary share paid/declared3.75p3.70p1.4%
Ongoing charges (further details below)*1.06%1.09%
Ordinary shares in issue        361,445,105378,289,047

* Alternative performance measure. Details provided in the Glossary below.

Key Performance Indicators
The Board has the following Key Performance Indicators (KPIs) that are used to gauge the success of the Company’s strategy and its outcome to shareholders.

  • NAV total return* – Over the year, the NAV total return of the Trust was 38.4% (2020: -2.5%), which compares to 38.3% for the peer group and 23.1% for the FTSE All-Share Index. Since the listing of Diverse in April 2011, the NAV total return was 239.7% to 31 May 2021, which compares to 135.8% for the peer group and 83.0% for the FTSE All-Share Index.
  • Growth of ordinary dividends to shareholders – Over the year, the four dividends to shareholders have increased from 3.70p to 3.75p. The Trust’s revenue per share for the year to 31 May 2021 has recovered strongly from the prior year. The Trust has retained an unbroken dividend record without distributing capital, but we have drawn very modestly on retained revenue reserves.
  • Discount* – Over the year to 31 May 2021, the share price discount averaged 4.7%, moving from a larger discount at the start of the year to a premium to NAV after Brexit occurred. Over the ten years since listing, the Company’s share price has largely matched its NAV.
  • Ongoing Charges* – The ongoing charges for the year to 31 May 2021 are 1.06% of NAV (2020: 1.09%), which compares with 0.92% for the peer group**. The Board pays careful attention to expenses and believes that the Trust’s overall costs are justifiable in the context of its specialist investment universe, and premium returns it has delivered since issue. More detail of the ongoing charges are provided below.

* Alternative performance measure. Details provided in the Glossary below.

** The peer group is as defined in the glossary. One outlier (British & American Investment Trust) has been excluded from the calculation of the peer group’s ongoing charges ratio, in order to provide a figure which is comparable and not skewed by one exceptionally high ratio.

CHAIRMAN’S STATEMENT

“The Company’s NAV total return was 38.4%, well ahead of the FTSE All Share Index’s total return of 23.1%”

Andrew Bell
Chairman

This report covers the results for the year ended 31 May 2021, the tenth year since the Diverse Income Trust listed on the stock market in 2011. It was a turbulent year in both economic and social terms, as governments responded to the pressures to preserve lives and livelihoods in the face of the COVID-19 pandemic. The rapid deployment of vaccines (developed in record time) and improvements in therapeutic care for those infected meant that the year ended with the UK and other developed economies reopening, a much more hopeful environment for corporate and personal wellbeing than prevailed for most of the period.

Returns during the year
Over the year to May 2021, the Company’s Net Asset Value (NAV) increased by 33.2%. When the four quarterly dividends paid to shareholders within the year to May 2021 are included, the Company’s NAV total return was 38.4%. The share price total return (boosted by a move from a 5.4% discount at the start of the period to a premium of 0.6% at the end) was 47.6%. These figures were all well ahead of the FTSE All Share Index’s total return of 23.1%.

Over the period, in total return terms, the FTSE SmallCap Index (excluding Investment Companies) appreciated by 69.3% and the FTSE AIM All Share Index was up 44.6%. Although the Company’s returns lagged the recovery in these areas, the Company’s portfolio was well-represented in AIM and other smallcap stocks, which helped drive our outperformance of the overall UK market.

The Company’s revenue earnings grew from 3.27p to 3.73p, recovering much of the ground lost in the previous year, when the onset of the pandemic led to widespread dividend cuts in the UK market. The Board is recommending a final dividend of 1.10p (2020: 1.05p). This makes the total dividend for the year 3.75p, which represents a 1.4% increase on the prior year. As in 2020, this has involved drawing upon retained revenue reserves, although to a much reduced extent. The Board’s expectation is that the Company’s revenue earnings will continue to recover, restoring the normal position where annual revenue earnings fully fund the year’s dividends and dividend growth.

Returns since the Company was first listed in April 2011
Over the ten years (and one month) since the Company was first listed in April 2011, the Company’s NAV total return including dividends paid to shareholders was 239.7%. The share price total return was 227.1%. Both measures are well ahead of the main measures of UK equity performance over the same period. The total return on the FTSE All Share Index was 83.0%, while that of the FTSE SmallCap Index (excluding Investment Trusts) was 202.2% and that of the FTSE AIM All Share Index was 52.9%. Please refer to page 6 of the full Annual Report for a graph of the Company’s NAV Total Return since launch on 28 April 2011 in comparison with the FTSE All-Share Index Total Return over the same period.

Share Issuance and Redemptions
Over the year to May 2021, the Company’s share price discount to its daily NAV averaged 4.8%. This masks an underlying improvement, from discounts of 5-12% in the early part of the period when COVID-19 uncertainty was at its peak, to a premium of over 2% shortly before the period end. Sentiment towards UK equities improved following the Brexit agreement reached in December and as the recovery prospects for the domestic economy improved following the successful vaccination programme. The rerating towards the end of the period enabled the Company to issue new shares at a premium to the prevailing NAV. This is modestly accretive to shareholders’ NAV, spreads the fixed costs of the Company over a larger number of shares and should contribute to increased dealing liquidity of the Company’s shares in the market.

The Company offers all shareholders the option to redeem their shares each year. At the end of April, 347,580 shares were offered for redemption, which were sold on the redeeming shareholders’ behalf to new investors at the redemption point NAV at the end of May 2021. During the year, the Company also issued 3,400,000 new ordinary shares at a premium to the NAV, utilising the block listing facility. Following the year end, block listing of a further 26,104,001 shares was applied for and granted.

Board succession
Although referred to at the interim stage, it is only right to reiterate the Board’s thanks to Michael Wrobel, my predecessor as Chairman, who stood down at last year’s AGM. Under his leadership, the Company had a highly successful first nine years as a quoted company, with our Manager’s skill taking advantage of many of the opportunities presented and avoiding many of the pitfalls. Paul Craig, who has been a director since 2011 will (along with the rest of the Board) be standing for re-election this year, but will stand down once a successor has been appointed.

Prospects
UK equities have in recent years been widely shunned by investors, for a combination of Brexit related reasons and the domination of the FTSE 100 index by companies in sectors with low growth prospects. As the economy reopens from the COVID related lockdowns, amid record low interest rates and fiscal stimulus, the prospects for the domestic economy (to which many smaller companies are exposed) have brightened considerably.

Internationally, the decades-long trend of falling bond yields appears to have reached a turning point. A combination of accelerating global economic recovery from the pandemic, allied to higher long bond yields would favour performance from a wider range of sectors than the rapidly-growing (in some cases non-profit-making) technology stocks which have dominated the league tables in recent years. There is a related risk that governments and central banks overdo the stimulus, prompting a rise in inflation which would ultimately need to be countered by tighter policy, but at present this appears a potential worry for future years rather than an imminent concern.

Global stock markets have continued to rise this year, with strong performance from many UK quoted smallcaps, which are benefiting from improved earnings prospects as well as some reversal of the fund outflows during the years of Brexit uncertainty.

The Diverse Income Trust pursues an investment approach covering the whole UK quoted universe, which enables the stock picking skills and experience of our Manager to construct a portfolio which is both distinct from the relatively concentrated nature of the market index and has more diverse sources of income, avoiding overdependence on what proved to be unreliable dividend payers in the FTSE 100 index.

Andrew Bell
Chairman

9 August 2021


MANAGER’S REPORT

Who are the fund managers of the Company?
Premier Miton Group plc is an independent, listed fund management company, formed from the merger of Premier Asset Management and Miton Group in November 2019, with a well-established reputation for successfully managing UK-quoted smaller company portfolios over the longer term. The Company’s Board appointed Miton Group (now Premier Miton Group) as Manager when it was listed in April 2011.

The day-to-day management of the Company’s portfolio continues to be carried out by Gervais Williams and Martin Turner, who came together as a team in April 2011.

Gervais Williams
Gervais joined Miton in March 2011 and is now Head of Equities in Premier Miton. He has been an equity fund manager since 1985, including 17 years at Gartmore. He was named Fund Manager of the Year by What Investment? in 2014. Gervais is also a board member of the Quoted Companies Alliance and a member of the AIM Advisory Council.

Martin Turner
Martin joined Miton in May 2011. Martin and Gervais have had a close working relationship since 2004, with complementary expertise that led them to back a series of successful companies. Martin qualified as a Chartered Accountant with Arthur Anderson and had senior roles and extensive experience at Merrill Lynch and Collins Stewart.

What were the main influences on the Company’s performance over the year?
The year to May 2021 was a period when share prices around the world continued to recover after the pandemic setback, often moving towards new highs. Whilst the FTSE All Share Index total return was 23.1%, the share prices of UK quoted smallcaps delivered even stronger returns, in part due to reassurance about the domestic prospects of the UK after the Brexit agreement, and in part because smallcaps are often immature businesses with prospects that are less reliant on global growth. The total return of the FTSE SmallCap Index (excluding investment companies) index was 69.3% and the FTSE AIM All Share Index was 44.6%.

Whilst economic conditions were challenging for many companies during the global pandemic, for some the relatively abrupt changes in customer behaviour enhanced their prospects. CMC Markets, the Contract for Differences trading business for example, enjoyed very strong trading conditions over the year to May 2021, and greatly increased its profits and dividend payments. CMC Markets was the largest contributor over the year under review, adding 3.5% to the return of the Company.

The second best contributor was K3 Capital, a multi-disciplinary group of professional services businesses advising small to medium enterprises on matters such as Mergers and Acquisitions. Although volumes were weak at this time last year, K3 Capital scaled up its operations via two complementary acquisitions at a time when corporate valuations were low. Subsequently, as SME transactions have recovered, the combined business has gone on to generate much greater cash surpluses than previously anticipated. K3 Capital enhanced the return of the Company by 1.9%.

The holdings in 888 Holdings, Kenmare Resources and Strix Group contributed over 1.0% each to the Company’s returns in the period under review.

The portfolio holding that most detracted from the Company’s return during the year was Manolete. Its share price had performed strongly in previous years, as it helped insolvent businesses fund past legal cases. This business has found it more difficult over the pandemic as there have been fewer court sittings. Much of the holding was sold early in the period, and it was sold entirely by the year end. Another disappointing holding was Centamin, a gold miner which was obliged to mine some lesser grade ore due to safety concerns on its planned operations. In our view, Centamin will mine the higher grade ore in future years so the holding has been increased during a time when the share price was weak, in anticipation of future dividend growth. Together these holdings detracted 1.7% from returns in the year.

Overall, the Company’s NAV total return over the year was 38.4%, which compares favourably with the return of the FTSE All Share Index.

Why has the Company paid shareholders a dividend that exceeds the revenue per share again this year?
Last year, the Company’s revenue per share fell 17% as numerous UK quoted companies cut or ceased to pay their dividends at the onset of the global pandemic. Whilst some companies that passed their dividends in the previous year have resumed dividend payments this year, the overall dividend income from the UK stock market is still very much lower than it was previously.

In contrast, this year the Company’s revenue per share has almost matched that of the year to May 2019. In part this reflects superior stock selection where many portfolio holdings have now resumed dividends after they cut them last year. Alongside, some portfolio companies such as CMC Markets and K3 Capital have paid much larger dividends than in previous years. In addition, the Company took a major cash profit on a FTSE 100 Put option during the stock market setback in March 2020, and hence at the start of the year under review, it had new capital to invest in additional income shares at a time when their share prices were weak.

Last year, the Board underlined its confidence in the prospect for an improvement in the Company’s revenue per share this year, by recommending a slight increase in the final dividend, even though the distribution needed to use a part of the past revenue reserves. This year, the revenue per share almost covers the Company’s current dividend, and the Trust does not need to draw upon capital to fund the dividend shortfall. Whilst there may not be such a marked improvement in the revenue per share in the coming year, the Board has concluded that the present dividend to shareholders is sustainable. On that basis they have indicated their confidence again by recommending a slight increase in the final dividend, using a modest sum from the past revenue reserves.

What are the main factors that have driven the Company’s returns since it first listed in April 2011?
Over the ten years and one month since the Company was first listed in April 2011, central banks have injected plentiful economic stimulus, often via Quantitative Easing. Over time, this has driven up the valuation of all assets, with the price of UK 10-year government bonds rising so that they now yield just 0.6% per annum compared with 3.5% ten years ago. Hence, global stock markets have generally delivered good returns over the last 10 years, despite the impact of the global pandemic.

Even with the uncertainties regarding the UK’s negotiation of its exit from the EU after the Brexit referendum, the total return on the FTSE All Share Index since April 2011 was 83.0%. The UK stock market has greater potential to add value than many others, as it has such a large universe of smallcap quoted companies, which have greater scope to grow and are less efficiently valued. Over the period since the Company’s issue, the FTSE SmallCap Index (excluding Investment Companies) has delivered a total return of 202.2%.

Even so, not all quoted smallcap share prices have performed as strongly, as the total return on the FTSE AIM All Share Index was 52.9%, which is actually rather less than the return of the FTSE All Share Index. All this underlines why a multicap approach as used by the Company, needs to be actively managed. This offers scope for the investment managers to participate in many of the equity income smallcaps that outperform, and hopefully avoid, many of those that do not. The Company’s strategy of seeking quoted companies that are well-positioned to generate abnormal cash surpluses has delivered significant added value due to superior stock selection over the period. The NAV total return on the Diverse Income Trust was 239.7% over the period, well ahead of the comparatives.

Total Returns since inception%
The Diverse Income Trust Plc – Ordinary Shares239.75
FTSE All-Share83.03
FTSE Small Cap Ex Investment Trusts202.19
FTSE AIM All-Share52.92

How is the climate change agenda reflected in the Company’s portfolio?
Whilst some fund strategies are dedicated to investing solely in low-carbon companies that are already close to meeting the climate change agenda, the interconnected nature of the corporate world means that many of these still have a reliance on others that are less well aligned. Specifically, we believe that the financial markets have a major role in actively engaging with the less-aligned companies. Each needs to make an assessment of its current carbon footprint and then plan to steadily reduce it in future. Evolving a business towards a zero carbon future, will involve very substantial investment, so access to capital will be an important component of these plans.

As managers of The Diverse Income Trust we have a long history of actively highlighting areas of potential hazard with the management teams of quoted companies, so that they can be considered, and the risks moderated. In that regard, we actively quiz management teams as to how they are planning to address the climate change agenda, and often give best practice examples of others’ actions. This strategy does involve engaging with some that currently have poor metrics, on the basis that reductions in the carbon footprints of these kinds of companies are needed for the UK economy as a whole to meet its zero carbon commitment.

The way we see it, many of the current activities of businesses will either become unviable as the costs of carbon emissions becomes prohibitive, or customer preferences will change and lead to a major decline in demand. Thus, all companies will need to embrace change and step up investment, so they remain sustainable in all senses of the word. For some, moving ahead of others may offer commercial advantage, and hence enhanced returns. Conversely, some may misjudge how quickly others respond, and carry additional downside risks. The bottom line is that the Company’s portfolio does have shareholdings in all sorts of businesses that need to change to meet the climate change agenda. In our view, their willingness to invest, and shareholders’ willingness to fund that investment, will help them succeed in addressing the climate change agenda. This progress will not only actively assist the UK to become a low-carbon economy, but also, ultimately, to deliver ongoing returns to investors.

What impact would a sustained pick up in global inflation have on the Company?
After the surge of economic stimulus following the global pandemic, all sorts of industry bottlenecks have occurred and there are renewed inflationary pressures. At this stage, it is unknown whether the rise in inflation will prove to be temporary or persistent in nature.

If inflation did prove to be more persistent, then the yields of long-dated bonds might rise, and weigh on the valuations of all assets, including stock markets. This would make it harder for all investment strategies to deliver capital gains, and investor returns might become more reliant on assets that delivered a part of their return via income, like that of the Diverse Income Trust.

Furthermore, if inflation were sustained, then it might greatly reduce the scope for central banks or governments to inject economic stimulus in future and, ultimately, put more companies at risk of insolvency. Listed stocks, with their access to external capital, tend to be much more resilient than private companies because their capital structures tend to be principally financed by risk capital rather than debt. Furthermore, if insolvencies were to rise, quoted companies can acquire previously over-borrowed, but otherwise viable, businesses from the receiver. These kinds of acquisitions often bring additional skilled staff and the prospect of generating additional cash returns, which further boosts the returns of the acquirers at a time when most other assets are not delivering much return. This pattern of enhanced returns can be even more dramatic for quoted smallcaps, as sometimes low-cost acquisitions from the receivers can be transformative to their prospects.

Overall, a sustained increase in inflation would make it harder for nearly all assets to deliver returns as good as those of recent decades. Although The Diverse Income Trust might not deliver returns as strong as those of the last ten years if market trends were to change, it is anticipated that the Company’s multicap, equity income strategy could outperform a wider range of strategies than previously.

How unusual is the multicap investment universe of the UK stock markets?
Prior to the long period of globalisation, returns on mainstream stock markets were often not much higher than that of underlying inflation. At that time, institutions actively allocated capital to quoted smallcaps because they needed access to the premium returns they offered.

During the period of globalisation, asset returns of all kinds have been unusually plentiful, so institutional interest in quoted smallcap strategies has been crowded out by larger weightings in long-duration assets such as the US technology stocks. Meanwhile, many quoted smallcap exchanges around the world have closed over recent decades, for lack of institutional interest.

In contrast to others, the UK stock market has retained a vibrant smallcap exchange due to dedicated tax exemptions, because the UK Government favours the fact that these businesses generate additional skilled employment and increased productivity compared with the mainstream companies, and ultimately that they pay much tax take locally. Hence, the UK stock market differs from others in still retaining a genuine multicap investment universe, not only including numerous quoted mainstream stocks, but also a plentiful universe of quoted smallcaps, with business operating across a very wide range of industry sectors.

In summary, whilst the prospects for the UK economy may not differ much from others, the multicap investment universe of UK stock exchanges is almost unique. If market trends were to change, and if investors were to seek diversification away from strategies that perform well when bond valuations are rising, then the UK stock market would be well-placed to attract much greater institutional allocations.

What are the prospects for the Company?  
As the yield on government debt has progressively fallen over recent decades, it has been a tailwind for asset prices of all kinds. Long-dated bonds have outperformed, with the longest dated often outperforming the most. Within equities, US technology stocks, whose valuation is significantly boosted by higher bond prices, have tended to appreciate quicker than most others.

Whilst numerous business are reporting excellent order books at present, many are also juggling these with all sorts of supply bottlenecks. Importantly in our view, many investors assume that the current industry bottlenecks are transitory. This comfortable position was reinforced over the first half of the year by the ongoing appreciation of global assets. The significant degree to which the stock market appreciation was fuelled by the running down the US Government’s cash surplus, and the ongoing Quantitative Easing policy is largely overlooked.

We are concerned that market liquidity could narrow in future, and new risks might emerge such as the US Senate starting to game the forthcoming budget ceiling negotiations. Alongside, the global recovery in the first half was smoothed by the running down of global inventories. Unfortunately, we are worried that the component and staffing problems will persist, and the global economy could struggle to even sustain the output of the first half of 2021.

When this is set in the context of a stock market where corporate valuations are already standing at very elevated levels, even a slight reduction in market liquidity could lead to a pullback in stock market valuations. In recent weeks, a FTSE100 Put with an exercise level of 6,200 and a term to December 2022 has been purchased, covering 38% of the current portfolio value.

The bottom line is that after some decades of importing deflation, the current bottlenecks have changed the dynamic. If this pattern persists, as we fear it might, then investors will start to reweight their holdings away from popular US technology stocks to reallocate toward equity holdings with reliable surplus cash generation, albeit that they might have lesser growth prospects. In this regard, the UK stock market with its multicap universe including major companies paying good and growing dividends, along with younger smallcaps that often serve immature industry sectors, is well placed to participate.

Overall, whatever the outcome regarding these near-term worries, we believe the Diverse Income Trust strategy will continue to be better placed than most others. Should the past market trends return, then the Diverse Income Trust may continue to be one of the better performing strategies in its peer group, as it has been over the last ten years. Conversely, if market trends are changing, then a UK multicap income investment universe might outperform others, including other stock markets such as the US.

Gervais Williams and Martin Turner
9 August 2021

PORTFOLIO INFORMATION
AS AT 31 MAY 2021


Rank     Company
Sector &
main activity
Valuation
£000
% of
net assets
Yield1
1            CMC MarketsFinancials15,8203.74.4 
2            K3 Capital2Financials10,3902.41.8 
3            Kenmare ResourcesBasic Materials8,8812.11.7 
4            888Consumer Discretionary8,3001.93.2 
5            Strix2Industrials7,5561.82.6 
6            Legal & GeneralFinancials6,0251.46.2 
7            JustFinancials5,9771.4– 
8            National GridUtilities5,5441.35.0 
9            Intermediate CapitalFinancials5,5291.32.5 
10          MANFinancials5,4211.33.1 
Top 10 investments79,44318.6
11          Randall & Quilter2Financials5,3711.35.0 
12          Amino Technologies2Telecommunications5,3421.21.3 
13          Sainsbury (J)Consumer Staples5,2341.24.0 
14          DRAXUtilities5,2131.23.9 
15          Morrison (WM) SupermarketsConsumer Staples5,2051.23.9 
16          Diversified Energy2Energy5,1731.210.7 
17          FRP Advisory2Industrials5,1421.22.2 
18          Direct Line InsuranceFinancials5,0661.27.4 
19          Inspiration Healthcare2Health Care5,0651.20.4 
20          PhoenixFinancials5,0561.26.5 
Top 20 investments131,31030.7
21          Blackbird2Technology5,0551.2– 
22          AdmiralFinancials5,0531.24.0 
23          Smurfit KappaIndustrials4,9141.12.7 
24          DWFIndustrials4,7861.12.1 
25          AVIVAFinancials4,7121.15.1 
26          Sabre InsuranceFinancials4,7041.14.2 
27          iEnergizer2Industrials4,6051.14.6 
28          AO WorldConsumer Discretionary4,5941.1– 
29          BTTelecommunications4,5851.1– 
30          Pan African Resources2Basic Materials4,5151.03.0 
Top 30 investments178,83341.8
31          CentaminBasic Materials4,3501.06.8 
32          Rio TintoBasic Materials4,3331.04.9 
33          Bloomsbury PublishingConsumer Discretionary4,3201.02.5 
34          XPS PensionsFinancials4,3011.05.0 
35          PersimmonConsumer Discretionary4,2901.03.5 
36          Jadestone EnergyEnergy4,2131.0– 
37          Polymetal InternationalBasic Materials4,1791.05.4 
38          ForterraIndustrials4,1341.01.0 
39          M&GFinancials4,1141.07.5 
40          Concurrent Technologies2Technology4,0880.92.8 
Top 40 investments221,15551.7
Balance held in 88 equity investments191,41344.8
Total equity investments412,56896.5
600 Group 8% Convertible Loan Notes 14/02/202232,2550.5
Fixed interest investments2,2550.5
Total investment portfolio414,82397.0
Other net current assets12,8193.0
Net assets427,642100.0

 

A copy of the latest month end top 20 holdings may be found on the Company’s website, www.diverseincometrust.com.

1 Source: Refinitiv. Dividend yield based upon historic dividends and therefore not representative of future yield and includes special dividends where known.
2 AIM/NEX listed.
3 Bermuda Stock Exchange listed

Portfolio exposure by sector£414.8 million
%
Financials31.3
Industrials15.8
Basic Materials11.4
Consumer Discretionary9.6
Energy7.6
Consumer Staples5.8
Telecomms3.9
Health Care3.4
Technology3.2
Real Estate3.2
Utilities2.7
Oil & Gas1.6
Fixed interest0.5
100.0
Actual income by sector£15.5 million
%
Financials40.0
Industrials14.5
Basic Materials12.4
Consumer Discretionary6.2
Energy5.8
Consumer Staples5.3
Utilities3.5
Oil & Gas2.9
Telecomms2.5
Fixed Interest2.5
Real Estate2.3
Health Care1.1
Technology1.0
100.0
Portfolio by asset allocation£414.8 million
%
AIM/NEX Exchanges35.3
FTSE 100 Index23.5
FTSE 250 Index21.8
FTSE SmallCap Index14.0
Other2.9
FTSE Fledgling Index1.3
International Equities0.7
Fixed Interest0.5
100.0
Portfolio by spread of investment income£15.5 million
%
FTSE 100 Index32.7
FTSE 250 Index30.4
AIM/NEX Exchanges19.7
 FTSE SmallCap Index6.3
Other3.9
International Equities2.9
Fixed Interest2.5
FTSE Fledgling Index1.6
100.0

Source: Thomson Reuters.

The London Stock Exchange (“LSE”) assigns all UK-quoted companies to an industrial sector and frequently to a stock market index. The LSE also assigns industrial sectors to many international quoted equities as well, and those that have not been classified by the LSE have been assigned as though they had. The portfolio as at 31 May 2021 is set out in some detail above, in line with that included in the Balance Sheet. The income from investments above comprises all of the income from the portfolio as included in the Income Statement for the year ended 31 May 2021. The AIM and NEX markets are both UK exchanges specifically set up to meet the requirements of smaller listed companies.

The first two bars above determine the overall sector weightings of the Company’s capital at the end of the year and with regard to the income received by the Company over the year. The second pair of bars illustrates the LSE stock market index within which portfolio companies sit and the source of the income received by the Company over the year.

Investments for the Company’s portfolio are principally selected on their individual merits. As the portfolio evolves, the Investment Manager continuously reviews the portfolio’s overall sector and index balance to ensure that it remains in line with the underlying conviction of the Investment Manager. The Investment Policy is set out below and details regarding risk diversification and other policies are set out each year in the Annual Report.

A Summary of the Total Costs Involved in Managing Diverse

Investment trusts differ from some other forms of collective funds in that they are set up as independent corporations with their operations overseen by a board that is separate from and independent of the fund management group that manages the capital. In addition, they are listed, with their shares traded on an approved exchange – which, in our case, is the LSE.

Running costs are deducted from the total assets of the Group on a pro-forma basis so the NAV published each day is expressed after costs. The figures below are the costs paid by the Group over the year under review and are expressed as a percentage of the average asset value of the Group over the year to 31 May 2021 of £359,991,000 (year to 31 May 2020: £346,694,000).

20212020
%%
Fund management fees10.850.86
Administration costs, including Company Secretarial fees0.040.04
Directors/Auditor/Depositary/Registrar/Custodian and Stockbroker fees0.100.12
All other direct costs, including VAT on the fees above, plus marketing, legal, printing, insurance and bank charges0.070.07

Ongoing charges

1.06

1.09

In addition, the Company also pays transaction charges that are levied when shares are bought or sold in the portfolio. These are dealing commissions paid to stockbrokers and stamp duty, a Government tax paid on transactions (which is zero when dealing on the AIM/NEX exchanges).

20212020
%%
Costs paid in dealing commissions0.030.05
Stamp duty, a Government tax on transactions0.100.14
Overall costs including charges on transactions21.191.28

The overall costs of the Company for the period were 1.19%. This compares with the Company’s average NAV total return since issue of 12.9% per annum (after the deduction of costs).

1 Fund management fees are tiered and calculated based on the share price, so may vary in each year. With effect from 1 August 2019, the Manager received a management fee of 0.9% per annum on the adjusted market capitalisation of the Company up to £300m, 0.8% per annum on the average market capitalisation between £300m and £500m and 0.7% per annum on the average market capitalisation above £500m.

2 Transactions conducted by the Company also involve some loss of value due to the dealing spread in stock exchange prices. Spreads range from less than 1% in the most actively traded large cap stocks to more than 3% in the smallest, most infrequently traded stocks. The exact loss of value is difficult to determine precisely, but is normally less than half of the dealing spread at the time of the transaction. In a large percentage of the transactions, especially in the smallest stocks, the stock is passed through from sizeable seller to sizeable buyer on a ‘put through’ basis with potentially no loss of value through the spread. During the year under review, this cost is believed to be very modest in comparison to the NAV.

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