We're not scared of Trump or interest rates, says Diverse Income duo

Premier Miton's Gervais Williams and Martin Turner believe their far-reaching multi-cap strategy has all the elements required to navigate protectionist policies and higher-for-longer rates.

US protectionism and higher interest rates don’t scare Premier Miton duo Gervais Williams and Martin Turner, who believe they could be a boon to UK equities and their Diverse Income (DIVI ) trust.

The managers of the £224m UK multi-cap strategy believe they can continue to deliver outsized returns in what is fast becoming a deglobalised world of higher borrowing costs.

Half-year results to the end of November revealed mid-cap gains drove a net asset value (NAV) total return of 4.9%, beating the Deutsche Numis All-Share benchmark, which rose 2.1%, and moving even further ahead of the Deutsche Numis Smaller Companies plus AIM index, which fell 2.3%.

Williams and Turner believe that despite the challenges faced by global markets and economies, the UK stock market’s ‘large cohort of equity income stocks is overwhelming important’ and will make the UK ‘one of the best performing of global exchanges – as it was in the 1970s’.

The reason for this is the shift away from a period of globalisation that fostered progressively lower interest rates, abundant market liquidity and easily financed budget deficits – a backdrop that favoured large and mega-caps.

However, protectionism, geopolitical tensions, rising government debt costs, and extra spending on defence and unemployment will result in liquidity drying up, but the situation isn’t all bad, particularly for smaller companies.

‘During periods of persistent market liquidity challenge in the past, numerous corporates often ran short of ready cash,’ said the managers.

‘In contrast, those generating surplus cash didn’t just survive, but had the advantage that they could actively enhance their earnings growth potential. They could fund expansion into the markets vacated by insolvencies.’

The acquisitions of ‘over-leveraged but otherwise viable companies’ typically resulted in ‘unusually strong returns on capital, such that mid and small-cap deals in particular, could sometimes deliver aggressive earnings upgrades’.

Of even more importance is the outperformance of small and mid-cap stocks against their larger counterparts during times of rising inflation.

‘In short, whilst US protectionism may unsettle global stock markets and UK interest rates may remain higher than desired, we view all this positively,’ said Williams and Turner.

A weak UK exchange rate against the dollar would cause no issue for the larger companies listed in London due to the largest stocks typically having a large overseas component.

Williams and Turner may spy plenty of potential in the UK market against the current global backdrop, but attracting institutional investors to the UK needs to happen to brighten ‘depressing’ share prices and valuations.

A rush of buybacks is ‘offsetting this adverse trend’, but generally even successful stocks haven’t risen as much as they might otherwise on the back of good results since the UK remains out of favour.

This has led Williams and Turner to sit tight on their holdings and not take profits, meaning the largest holdings have grow to a large weighting in the portfolio. Construction group Galliford Try (GFFD) is the largest position at 3.2%, followed by interdealer broker TP ICAP (TCAP) at 3% and payment systems group Paypoint (PAY) at 2.99%.   

While half-year results are positive, and the fund has increased the NAV and share price by over 20% in the past year, it is the worst performing fund in its UK equity income sector over three years, with a flat NAV and a share price fall of 5.5%, dropping far below the 23.9% return from the FTSE All-Share index.