Diverse Income Trust plc (LON:DIVI) fund managers, Gervais Williams and Martin Turner, provide their latest Investment Insights for the period to 31 July 2022.
Although anxiety about European energy supplies remains chronic, during July investors sensed that the adverse stock market momentum was reversing. The improved tone was most pronounced amongst large companies.
When stock market fluctuations are so volatile, companies listed on the Alternative Investment Market (AIM) can sometimes be overlooked. Hence, within the portfolio whilst the share prices of large companies paying an income appreciated well during July, these were often offset by declines in the share prices of the smaller income paying companies.
It isn’t unusual for there to be a marked performance differential between a multi-cap equity income strategy such as the Diverse Income Trust and other equity income funds. Longer term we believe the differential favours the Diverse Income strategy, as investing across a wider opportunity set offers the potential to access more companies with sustainable income, as well as the potential for dividend growth. In addition, within a larger opportunity set there can be more income generating companies that have attractive valuations that may have been overlooked. So, for example, there is the potential for income growth by taking profits from those companies that have performed well and which have lower dividend yields and using the proceeds to add new companies into the portfolio which have higher dividend yields.
In July last year we bought a FTSE 100 Index Put Option, a position we have held in the past. The Put Option was bought to potentially mitigate substantial falls in the FTSE 100 Index. Although global markets have been volatile subsequently, the FTSE 100 Index has held up rather better than others, however, the Put Option holding hasn’t offset the portfolio setback.
Whilst many UK company trading statements remain robust, we are unconvinced that inflationary pressures are being supressed as much as hoped. Alongside, we expect rising interest rates could lessen market liquidity (the ability to buy or sell assets easily), and hence stock markets could remain volatile. The cost of a FTSE 100 Index Put option fell low enough in the second half of July to justify extending the length of the current holding. Therefore, we extended the length of the trust’s FTSE 100 Index Put option from December 2022 to December 2023, at a potential cost (if FTSE 100 Index doesn’t suffer a significant setback) of around 1% per annum to the trust’s performance.
Gervais Williams & Martin Turner, Diverse Income Trust