Diverse Income (DIVI ) fund managers Gervais Williams and Martin Turner have said that prospects for the investment trust’s ‘multi-cap’ strategy are the greatest in thirty years, but have failed to detail the stocks that drove its underperformance for a second year.

Writing in the UK equity income trust’s annual report, the Premier Miton managers said companies generating excess cash, on which they focus, have the advantage during a recession because they are not reliant on expensive debt when acquiring cheap companies.

The UK’s knockdown valuations present an opportunity for them to drive investment returns at little cost, especially as risk diversification means international allocations will turn to cheap UK equities, boosting prices. 

UK small and medium-sized companies have underperformed in recent years because of the decline in their valuation rather than poorer trading performance, the managers pointed out.

They said this is demonstrated by the £277m small and mid-cap weighted portfolio trading at just 1.2 times ‘book’ or asset value compared to 1.6 times for the overall UK stock market as measured by the FTSE All-Share index and a lofty four times multiple for the US S&P 500 index.

‘When the asset class in question (UK-quoted multicap equity income stocks) starts at a particularly low valuation, along with very modest institutional allocations, such favourable trends can persist over very long time periods,’ Williams and Turner wrote. ‘We believe the prospects for the trust’s strategy are the greatest they have been for thirty years.’ 

However, the pair (pictured below) omitted to highlight the specific stocks driving a 16.2% drop in net asset value (NAV) including dividends in the year to 31 May and a 15.4% total loss for shareholders, both of which trailed its mostly large-cap focused peer group in the AIC UK Equity Income sector for a second year.

This compared with 0.4% and 11.1% falls in the Numis All-Share and Numis Small Cap Plus AIM indices.

Chair Andrew Bell, who is also chief executive of Witan (WTAN ), said: ‘As the past two years remind us, going against the crowd is not always rewarded in the short-term but the longer-term is more reassuring. It is worth recalling Warren Buffett’s aphorism that in the short run the stock market is a voting machine but in the long run it is a weighing machine,’ Bell said.

The trust’s shares ended the year at a 6% discount to NAV. Slightly more than a tenth of investors took up the annual redemption opportunity to sell their shares at par in April. The board redeemed these for cash that had built up in the portfolio including that from the takeover of K3 Capital.

Dividends over the year totalled 4.05p per share, a 3.8% increase on the previous year.

The 4.9%-yielder’s top holdings include mining company Kenmare Resources (KMR), housing and social care provider Mears Group (MER) and XPS Pensions (XPS), which have respective weightings of 2.9%, 2.6% and 2.3%.

Numis analyst Gavin Trodd said the nature of the portfolio meant performance would significantly diverge from the index and peers, with shareholder returns falling 2.7% over five years to date. Since launch in April 2011, however, shareholders, who include wealth managers Evelyn, Investec and Quilter, have done better than the index, receiving a 147% total return versus the FTSE All-Share’s 103%.

Performance since launch 

Source: Morningstar