The managers of Diverse Income (DIVI ) have dumped the ‘put option’ insurance policy as they believe UK markets will continue to head upwards and retain their place as a global leader. 

Premier Miton managers Gervais Williams and Martin Turner were encouraged by their £216m UK ‘multi-cap’ income trust’s much-improved performance over the 12 months to the end of May, with underlying total returns of 16.5% beating the 15.6% for both its peer group and the Deutsche Numis All Share comparator index, according to annual results. 

This marked a recovery on the 16.2% fall in the previous year, following which a quarter of investors, or 25.8% of capital, took up the annual August redemption opportunity to exit at par.

Smaller and AIM-listed companies led the charge in a recovery that allowed the board to lift the dividend from 4.05p to 4.25p as earnings improved.

However, shareholder returns totalled 12.7% owing to a widening of the discount from 6.2% to 8.6%. 

The pair did not renew the FTSE 100 defensive put option that expired in December, having lost 0.3% over the previous 12 months, in an indication that they believe the FTSE 100 will continue its upward march. The derivatives contract allows the managers to make money if the UK’s blue-chip crashes and has been in the portfolio since 2014.

Williams and Turner (pictured together below) noted that the 4.6%-yielding trust had been outpaced by fast-rising markets, especially in the US, but said that the focus on ‘overstretched’ mega-caps could soon make way for a turnaround in usually depressed global small-caps, resulting in a major performance catch-up.

‘Given that the UK stock market is starting from what appears to be a very undemanding valuation, and few global investors have a weighting in it, when it recovers it has the potential to outperform international markets for a long period, maybe a decade or two,’ they said. 

Since period end, the trust has delivered shareholder returns of 5.6% versus the FTSE All-Share index’s 1.6%, according to Morningstar data. Over a decade, shareholder returns of 62% trail the index’s 80%.

JPMorgan Cazenove’s Christopher Brown noted the annual redemption did not keep the shares as close to par as expected, with the current 9% discount wider than the AIC UK equity income peer group, suggesting the size focus of the portfolio drove the rating. He retained a ‘neutral’ recommendation.

Over the period, the board agreed to a lower fee with Premier Miton, which took effect from June. The prior fee was 0.9% of average market capitalisation up to £300m and 0.8% for £300m-£500m. That has fallen to 0.8% of average market capitalisation for up to £450m.

Portfolio rejig 

Over the year, UK financial stocks were the biggest driver of returns, with mid-cap spread-betting and share-trading platform CMC Markets (CMCX), leading the charge.

The company had seen its share price fall back considerably as it invested in widening its offer so customers could ‘participate in financial markets more efficiently’.

XPS Pensions (XPS), which advises pension schemes on reducing risks to ensure future pension obligations can be met, has been taking market share over recent years and ‘its growth rate accelerated this year’.

TP ICAP (TCAP), a platform connecting players in the global financial, energy and commodity markets, ‘invested heavily towards greatly improving the market liquidity of listed loans, typically corporate credit, that in our view will make its services considerably more valuable in future,’ said Williams and Turner.

However, the stock still stands on an ‘overlooked’ valuation and if it can continue to deliver further substantial dividend growth ‘we expect this to be accompanied by a major increase in its share price’.

One financial stock which was a major detractor was small-cap stock Vanquis Banking (VANQ). The specialist lender to those with poor credit is experiences a ‘series of claims coordinated by a single claims management company’.

Although the claims are individually modest, Vanquis was ‘obliged to fund the costs of the Financial Ombudsman as well as the cost of researching each claim’.

The pair sold building materials company Forterra (FORT), wholesale business Kitwave (KITW), airline Jet2 (JET2), packaging and paper group Mondi (MNDI) and housebuilder Vistry (VTY).

They bought renewable infrastructure fund Greencoat UK Wind (UKW ), oil and gas supplier Hunting (HTG), trading provider IG Group (IGG), energy solutions provider Yu Group (YU) and oil companies Ithaca Energy (ITH) and Shell (SHEL).