Various catalysts for performance catch-up for Diverse Income Trust plc (LON: DIVI)

Diverse Income Trust plc (LON:DIVI) invests primarily in quoted or traded UK companies with a wide range of market capitalisations, but a long-term bias toward small and medium sized companies. The Company may also invest in large companies, including FTSE 100 Index constituents, where it is believed that this may increase shareholder value.

The latest June 2022 factsheet has been published and can be found below the commentary.

Managers commentary

Stock markets have been unsettled over 2022, and were weak again in June. Over recent months, the accelerating rise in short term interest rates is expected to slow global demand, and potentially initiate a period of demand destruction, via a global recession. As forthcoming demand moderates, we fear there may be a decline in corporate profitability, either due to a competitive price war to retain customers, or due to sales disappointments. 

Despite giant challenges to the stock market participants over recent decades, generally financial conditions haven’t deteriorated as seriously as might be expected for any length of time, due to major liquidity injections from central banks and governments. In contrast with this slowdown, companies may now be facing the most severe cash shortage for three decades, given the ongoing rise in interest rates, and the price wars and sales disappointments they may precipitate. 

One of the advantages of an equity income portfolio is that during weak stock markets its dividend yield can rise (assuming its income is sustained) and this can be attractive to a wider range of investors. US dollar strength can favour the very largest UK quoted companies because typically these larger UK companies often derive the vast majority of their earnings from overseas. Meanwhile, many companies listed on the Alternative Investment Market (AIM) remain overlooked, and interest has been further tempered by the domestic political circus. 

This means that a major valuation gap has developed between the mainstream companies and some of the smaller market capitalisation companies. The same pattern has sometimes occurred in the past. There may be any number of reasons that catalyse a period of performance catch-up for the Diverse Income Trust. When this potential is combined with all the other advantages of the strategy, we consider the Trust’s prospects continue to remain attractive despite the unsettled stock markets, over both the short and longer term timeframes.

Gervais Williams & Martin Turner 30.06.2022

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