Gervais Williams, manager of Diverse Income Trust (LSE:DIVI), tells interactive investor’s Collectives Editor Kyle Caldwell, why he is finding so many opportunities at the moment in the UK market – particularly in the smaller company area. He names a couple of stocks he's finding attractive due to being overlooked and having high yields.
He also explains the types of companies he is more wary of investing in given anticipation of an economic slowdown, and names a recent stock purchase.
Diverse Income Trust is a member of interactive investor’s Super 60 list of fund ideas.
Kyle Caldwell, collectives editor at interactive investor: Hello and welcome to our latest Insider Interview. Today in the studio I have with me Gervais Williams, manager of Diverse Income investment trust. Gervais, thanks for coming in today.
Gervais Williams, manager of Diverse Income investment trust: It's a pleasure to be here.
Kyle Caldwell: To kick off, Gervais, could you summarise your investment approach for the investment trust?
Gervais Williams: The trust is an income fund. It's a UK-invested income fund. Specifically, it invests principally in UK quoted companies, both large companies where a lot of the income is generated, but also AIM-listed income stocks, which often are more mature, and which have the opportunity to grow, and are often in a wider range of sectors.
So, the nature of it is that it's a multi-cap approach invested in companies which, overall, generate not just sustainable income growth but ultimately better income growth for many others. And it's the combination of good income growth plus the underlying income which delivers hopefully an attractive return.
Kyle Caldwell: What's the current split between large, mid- and small-cap? I know that you do have a tendency to prefer the mid- and small-cap names. Is that the case at the moment?
Gervais Williams: Yes. The overall position hasn't changed that much. Typically, we have about 40% of the fund in the mid- and large-cap stocks. So, that's the top 350 holdings in the mainstream stock market, which includes about 50% or 60% in the smaller end, including about a third of the total fund in the market. So, it's quite skewed towards some of the smallest. But there's still a large number of FTSE 100 companies and some FTSE 250 companies in there as well.
Kyle Caldwell: And is it those FTSE 250 and the small-cap companies where you're finding the best value opportunities, given that part of the market's been out of favour for two years now, pretty much since interest rates start rising?
- The Income Investor: don’t miss these reliable income opportunities
- The income shares offering both growth and jam today
Gervais Williams: Yes. I mean, what's been a very big feature of the last three years, really, is that the mainstream FTSE 100 has held up extremely well. Indeed, in dollar terms, it is the best-performing stock market in the world over the last three years versus nearly all others around the world, which is quite a surprise.
Compare that with [the] smaller end of the stock market, the FTSE small caps and the AIM market, which has disappointed. Actually, the AIM markets underperformed the FTSE 100 by over 50% in the last three years. So, coming back to it, yes, there's lots of stocks further down the market capitalisation range, which are very overlooked, which are standing on low valuations, which have good prospects.
But I think that understates the potential for the mainstream FTSE 100. Even the mainstream energy stocks, some of the financial stocks, you can buy some mainstream large-cap financials with yields of 8%, 9%, 10%, sometimes growing their dividends at 5% a year, not just in the energy sector, not just in the mining sector, even in some of the financials. I think the UK's overlooked. I think small-caps are particularly overlooked at the moment.
Kyle Caldwell: Could you pick out a couple of examples of stocks that are trading on low valuations that in your view are unjust?
Gervais Williams: So if you take PayPoint (LSE:PAY), for example, it's a company involved in all the corner shops. When you go and pay for things, they use it as a terminal, but you can use it also to pay for your utility bills and that kind of thing. Specifically, it's a very nice company. It's made an acquisition, it's grown its dividend quite happily over recent years. It's yielding about 6.5%. It's grown its dividend at about 5.5%. So, coming back to it, that's a very attractive combination going forward and it's very much what we look for when we meet a company.
Another example is probably XPS Pensions Group (LSE:XPS), it’s a company again, which is involved in the financial sector. It happens to be advising pension schemes. Its yield's about four, but it grew its dividend about 17%, just under 17%, last year. Just fantastic figures really.
Kyle Caldwell: You mentioned you are finding opportunities across the whole market. Are there any particular sectors you're more wary of investing in, and any sectors that are trading on higher valuations?
Gervais Williams: Yes, we've been quite cautious, really, of the sort of cyclical-type businesses, companies which are reliant on economic growth. We think there is an economic slowdown coming. The UK economy itself hasn't come into recession as yet, but may come into the recession in future.
So, we are quite cautious regarding some of the cyclical opportunities. On the other hand, we're a little bit braver in certain areas which people find uncomfortable. As I mentioned earlier, the energy stocks, and I don't get me wrong, I think we need to address carbon and energy change, I think that's absolutely essential. But I think that we need to kind of bridge between here and there by using some carbon along the way. And I think some of those energy companies are very overlooked in the UK market, especially further down the market capitalisation range.
I think the same is true in the mining sector. Again, I think a lot of investors say they don't know what the price of copper is going to be in the future and suchlike, neither do I, but it's less correlated with the rest of the UK economy and you can sometimes find it when local businesses are suffering, some of these mining stocks are continuing to do pretty well. And again, these companies are standing on low valuations, generating surplus cash and generating very good dividends.
- The funds and sectors keeping ahead of inflation, and those falling short
- Fund Battle: can these rivals beat City of London for income?
Kyle Caldwell: And in terms of portfolio activity in 2023, has it been a busier year than usual given that you're finding plenty of opportunities? And could you name a recent purchase for the trust?
Gervais Williams: If anything, what we've seen is as the economy has slowed we've been a little bit more cautious about some existing holdings. So, if anything, [we’ve] sold more holdings and bought new holdings. The number of holdings, which is normally about 120, has probably slipped a little bit below 120 at the moment. So, there's just less companies which are doing well in our view. But on the other hand, there's still companies which are very overlooked.
A good example of that is a recent purchase, which is Yu Group (LSE:YU.), it's a utility. It's a bit like British Gas. It really supplies the corporate sector. And the really exciting thing about this is that it's tiny. Its service levels are very strong, but it's growing quite rapidly. So, here's a company which was valued at less than £20 million about three years ago. It's about £160 million market cap now.
And you might say, well, that's sounds like an awfully expensive company. It's generating cash, even at the end of this year, according to stock market forecasts, it's got about £35 million of cash in its balance sheet this year. And next December, it might rise to about £80 million, and thereafter it might be £106 million, according to the stock market forecast. And this company is now starting to pay dividends. So, we’ve got a company moving into cash flow surplus generating surplus cash, taking market share, and in a very resilient sector, just the combination we’re looking for.
Kyle Caldwell: And while it has been a tricky period for mid- and small-cap stocks, on the dividend front it's been more optimistic. Could you name a couple of companies that have performed well in terms of delivering good dividend growth over the past year?
Gervais Williams: Yes. The kind of companies we're looking for aren't just in the mainstream sectors. Of course, we're looking at the mainstream sectors. As I mentioned, there are some financials such as M&G (LSE:MNG), which is yielding 10% and it's grown its dividend by 5% this year. So, you know, some of the life companies have been very good.
Some of the insurance companies, again, Sabre Insurance Group (LSE:SBRE), another company which just doesn't have a big yield yet, but it's been growing its dividend, very strong results going forward. And then you look into the energy sector, and we have things like i3 Energy (LSE:I3E) sector, for example, which has grown its dividend the last three years, much stronger than Shell (LSE:SHEL) have done. So, it's still yielding about 7.5%on a prospective basis. And if there is a sustained oil price going forwards, if they spike up, for example, we think it would grow its dividend considerably faster than Shell going forward.
Kyle Caldwell: Thanks for coming in today.
Gervais Williams: Thank you very much indeed.
Kyle Caldwell: That's it for the latest episode of our Insider Interview. You can check out the rest of the series on our YouTube channel. Please let us know what you think you can comment, like, and please do hit that subscribe button as well. And hopefully I'll see you again next time.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.
Please note that our article on this investment should not be considered to be a regular publication.
Details of all recommendations issued by ii during the previous 12-month period can be found here.
ii adheres to a strict code of conduct. Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.
In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.