Diverse Income Trust plc (LON:DIVI) fund managers, Gervais Williams and Martin Turner, provide their latest Investment Insights for the period to 31 December 2022.
Capital appreciation has dominated stock market returns for decades. When these favourable periods run out of steam however, returns can disappoint for years thereafter. Salient examples are the end of the Japanese stock market bubble in 1989, or the huge underperformance of bank share prices from 2008 onwards after years of appreciation.
Generally, portfolios generating a stream of good and growing dividend income can deliver more consistent returns. Whilst returns can disappoint in individual years, the cash compounding (reinvestment of earnings to generate additional earnings) of the dividends becomes ever more substantial over time. New buyers may get higher yields during market setbacks, which can help retain investor enthusiasm.
With this background in mind, it is notable that the NAV of the Diverse Income Trust has fallen back considerably over the last six quarters, whilst its dividend distributions have continued to increase.
We have continued to sell down holdings where we believe their potential had become compromised, 888 Group was an example a few months ago. With sales such as these, the trust has run a larger cash balance than usual during the period of market weakness. As markets have started to rise recently, we have topped up some of the holdings that we felt were being sold at a price below their true value.
We believe the Diverse Income Trust’s strategy now looks attractive in comparison to the mainstream stock market in the UK and against some international stock markets as well. When the asset class in question (UK-quoted income stocks) starts at exceptionally low valuations, these kinds of favourable trends can be persistent over long time periods.
Gervais Williams & Martin Turner