THE DIVERSE INCOME TRUST: The trust in line to benefit from a British boost with a high exposure to smaller companies
British smaller companies can be a source of strong returns because they are nimbler and more innovative than their larger counterparts.
But because many rely on the domestic market for sales they have recently been vulnerable to Brexit nerves as many investors shunned Blighty for fear of a looming economic downturn.
But this reliance on UK customers could also prove an investment winner once the current political fog has cleared.
British smaller companies can be a source of strong returns because they are nimbler and more innovative than their larger counterparts
Gervais Williams, co-manager of The Diverse Income Trust, an investment trust with a high exposure to smaller companies, including many listed on the junior Alternative Investment Market, says: ‘We may see the total opposite to what happened after the Brexit vote. The pound could strengthen and instead of favouring international companies like tobacco giant BAT, investors could start to look for businesses profiting closer to home.’
Diversification is key. Williams and co-manager Martin Turner seek companies across a wide range of sectors with one proviso – they have strong balance sheets.
By that they mean low borrowings or, even better, plenty of cash in the bank. These are the firms that will also pay – hopefully increasing – dividends to shareholders. He says: ‘We are looking for those that are leaders in their subsectors.’
One home grown success story is wrapping paper maker IG Design Group – one of its top 10 holdings. It was among the managers’ earliest purchases when the trust launched in 2011 – at 50 pence a share. They are now worth £5.74, and the company sells in Europe and the US as well as the UK.
Another stake that has shown resilience is Randall & Quilter, an acquirer of general insurance companies in the UK, US and Europe. Williams says: ‘The insurance market has been largely unaffected by Brexit concerns, and in fact with insurers setting up offices in other European countries in preparation they may even thrive.’
A quirky recent addition is music royalties collector Hipgnosis Songs Fund. Williams says: ‘The fund buys up songs from their writers and then works out ways to make more money from them, such as doing deals with corporates who pay extra to use them as jingles in advertising.’ A recent purchase was Smooth, a massive 1999 hit by Latin rock band Santana.
Some holdings are more controversial, such as newly listed consumer loans firm Amigo and door to door lender Morses Club. Williams believes such companies fill a gap in the lending market. He is satisfied Amigo – which he describes as ‘well run’ – is transparent about its arrangements and understands Morses Club’s loan rates are high because of the cost of collecting repayments door to door.
Chris Salih, research analyst at investment fund ratings agency FundCalibre, says: ‘Williams has a lot of expertise investing in the small and mid-cap arena, both of which have been under pressure in the past few years – which consequently has led to somewhat mixed performance from this trust. Any changes in fortune for smaller and medium-sized companies generally should lead to better performance.’
The trust has strongly outperformed the FTSE All-Share Index – by 136 per cent compared to 30 per cent since launch in April 2011.
Anyone considering buying shares should have not more than 10 per cent of their overall portfolio in UK smaller companies. The dividend yield is 3.74 per cent, income paid quarterly, and the trust’s ongoing annual charge is 1.1 per cent.