TIDMDIVI
THE DIVERSE INCOME TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEARED 31 MAY 2021
The Directors present the Annual Financial Report of The Diverse Income Trust
plc (the "Company", "Diverse" or the "Trust") for the year ended 31 May 2021.
The full Annual Report and Accounts can be accessed via the Company's website,
www.diverseincometrust.com, or by contacting the Company Secretary on 01392
477500.
STRATEGIC REPORT
RESULTS FOR THE YEAR TO 31 MAY 2021
* NAV total return* to shareholders of 38.4% This includes the increase in
NAV, plus the dividends paid during the year and compares with an increase
in the FTSE All-Share Index of 23.1% on a total return basis over the year
to 31 May 2021.
* Over the year to 31 May 2021, the movement in the Company's NAV* was +33.2%
This compares with the FTSE All-Share Index that increased 19.4%.
* 3.75p of ordinary dividends for the year The three interim dividends and
the proposed final dividend for the year amount to 3.75p, compared with
3.70p in the previous year, an increase of 1.4%.
* Share price total return* to shareholders of 47.6% The share price total
return was 47.6%, boosted by the share price re-rating from a discount to a
premium to NAV.
* Revenue reserves were £15.2m (2020: £15.0m) The Company's revenue return
after taxation was £13.4m, which compares with dividends distributed to
shareholders during the year of £14.8m. At the year end £15.2m of revenue
reserves remain available to smooth forthcoming dividend distributions to
shareholders.
31 May 2021 31 May 2020 Change
NAV per ordinary share 118.31p 88.82p 33.2%
Ordinary share price (mid) 119.00p 84.00p 41.7%
Premium/(discount) to NAV* 0.58% (5.43%)
Revenue return per ordinary share 3.73p 3.27p
Dividends per ordinary share paid 3.75p 3.70p 1.4%
/declared
Ongoing charges (further details 1.06% 1.09%
below)*
Ordinary shares in issue 378,289,047
361,445,105
* Alternative performance measure. Details provided in the Glossary below.
Key Performance Indicators
The Board has the following Key Performance Indicators (KPIs) that are used to
gauge the success of the Company's strategy and its outcome to shareholders.
* NAV total return* - Over the year, the NAV total return of the Trust was
38.4% (2020: -2.5%), which compares to 38.3% for the peer group and 23.1%
for the FTSE All-Share Index. Since the listing of Diverse in April 2011,
the NAV total return was 239.7% to 31 May 2021, which compares to 135.8%
for the peer group and 83.0% for the FTSE All-Share Index.
* Growth of ordinary dividends to shareholders - Over the year, the four
dividends to shareholders have increased from 3.70p to 3.75p. The Trust's
revenue per share for the year to 31 May 2021 has recovered strongly from
the prior year. The Trust has retained an unbroken dividend record without
distributing capital, but we have drawn very modestly on retained revenue
reserves.
* Discount* - Over the year to 31 May 2021, the share price discount averaged
4.7%, moving from a larger discount at the start of the year to a premium
to NAV after Brexit occurred. Over the ten years since listing, the
Company's share price has largely matched its NAV.
* Ongoing Charges* - The ongoing charges for the year to 31 May 2021 are
1.06% of NAV (2020: 1.09%), which compares with 0.92% for the peer group**.
The Board pays careful attention to expenses and believes that the Trust's
overall costs are justifiable in the context of its specialist investment
universe, and premium returns it has delivered since issue. More detail of
the ongoing charges are provided below.
* Alternative performance measure. Details provided in the Glossary below.
** The peer group is as defined in the glossary. One outlier (British &
American Investment Trust) has been excluded from the calculation of the peer
group's ongoing charges ratio, in order to provide a figure which is comparable
and not skewed by one exceptionally high ratio.
CHAIRMAN'S STATEMENT
"The Company's NAV total return was 38.4%, well ahead of the FTSE All Share
Index's total return of 23.1%"
Andrew Bell
Chairman
This report covers the results for the year ended 31 May 2021, the tenth year
since the Diverse Income Trust listed on the stock market in 2011. It was a
turbulent year in both economic and social terms, as governments responded to
the pressures to preserve lives and livelihoods in the face of the COVID-19
pandemic. The rapid deployment of vaccines (developed in record time) and
improvements in therapeutic care for those infected meant that the year ended
with the UK and other developed economies reopening, a much more hopeful
environment for corporate and personal wellbeing than prevailed for most of the
period.
Returns during the year
Over the year to May 2021, the Company's Net Asset Value (NAV) increased by
33.2%. When the four quarterly dividends paid to shareholders within the year
to May 2021 are included, the Company's NAV total return was 38.4%. The share
price total return (boosted by a move from a 5.4% discount at the start of the
period to a premium of 0.6% at the end) was 47.6%. These figures were all well
ahead of the FTSE All Share Index's total return of 23.1%.
Over the period, in total return terms, the FTSE SmallCap Index (excluding
Investment Companies) appreciated by 69.3% and the FTSE AIM All Share Index was
up 44.6%. Although the Company's returns lagged the recovery in these areas,
the Company's portfolio was well-represented in AIM and other smallcap stocks,
which helped drive our outperformance of the overall UK market.
The Company's revenue earnings grew from 3.27p to 3.73p, recovering much of the
ground lost in the previous year, when the onset of the pandemic led to
widespread dividend cuts in the UK market. The Board is recommending a final
dividend of 1.10p (2020: 1.05p). This makes the total dividend for the year
3.75p, which represents a 1.4% increase on the prior year. As in 2020, this has
involved drawing upon retained revenue reserves, although to a much reduced
extent. The Board's expectation is that the Company's revenue earnings will
continue to recover, restoring the normal position where annual revenue
earnings fully fund the year's dividends and dividend growth.
Returns since the Company was first listed in April 2011
Over the ten years (and one month) since the Company was first listed in April
2011, the Company's NAV total return including dividends paid to shareholders
was 239.7%. The share price total return was 227.1%. Both measures are well
ahead of the main measures of UK equity performance over the same period. The
total return on the FTSE All Share Index was 83.0%, while that of the FTSE
SmallCap Index (excluding Investment Trusts) was 202.2% and that of the FTSE
AIM All Share Index was 52.9%. Please refer to page 6 of the full Annual Report
for a graph of the Company's NAV Total Return since launch on 28 April 2011 in
comparison with the FTSE All-Share Index Total Return over the same period.
Share Issuance and Redemptions
Over the year to May 2021, the Company's share price discount to its daily NAV
averaged 4.8%. This masks an underlying improvement, from discounts of 5-12% in
the early part of the period when COVID-19 uncertainty was at its peak, to a
premium of over 2% shortly before the period end. Sentiment towards UK equities
improved following the Brexit agreement reached in December and as the recovery
prospects for the domestic economy improved following the successful
vaccination programme. The rerating towards the end of the period enabled the
Company to issue new shares at a premium to the prevailing NAV. This is
modestly accretive to shareholders' NAV, spreads the fixed costs of the Company
over a larger number of shares and should contribute to increased dealing
liquidity of the Company's shares in the market.
The Company offers all shareholders the option to redeem their shares each
year. At the end of April, 347,580 shares were offered for redemption, which
were sold on the redeeming shareholders' behalf to new investors at the
redemption point NAV at the end of May 2021. During the year, the Company also
issued 3,400,000 new ordinary shares at a premium to the NAV, utilising the
block listing facility. Following the year end, block listing of a further
26,104,001 shares was applied for and granted.
Board succession
Although referred to at the interim stage, it is only right to reiterate the
Board's thanks to Michael Wrobel, my predecessor as Chairman, who stood down at
last year's AGM. Under his leadership, the Company had a highly successful
first nine years as a quoted company, with our Manager's skill taking advantage
of many of the opportunities presented and avoiding many of the pitfalls. Paul
Craig, who has been a director since 2011 will (along with the rest of the
Board) be standing for re-election this year, but will stand down once a
successor has been appointed.
Prospects
UK equities have in recent years been widely shunned by investors, for a
combination of Brexit related reasons and the domination of the FTSE 100 index
by companies in sectors with low growth prospects. As the economy reopens from
the COVID related lockdowns, amid record low interest rates and fiscal
stimulus, the prospects for the domestic economy (to which many smaller
companies are exposed) have brightened considerably.
Internationally, the decades-long trend of falling bond yields appears to have
reached a turning point. A combination of accelerating global economic recovery
from the pandemic, allied to higher long bond yields would favour performance
from a wider range of sectors than the rapidly-growing (in some cases
non-profit-making) technology stocks which have dominated the league tables in
recent years. There is a related risk that governments and central banks overdo
the stimulus, prompting a rise in inflation which would ultimately need to be
countered by tighter policy, but at present this appears a potential worry for
future years rather than an imminent concern.
Global stock markets have continued to rise this year, with strong performance
from many UK quoted smallcaps, which are benefiting from improved earnings
prospects as well as some reversal of the fund outflows during the years of
Brexit uncertainty.
The Diverse Income Trust pursues an investment approach covering the whole UK
quoted universe, which enables the stock picking skills and experience of our
Manager to construct a portfolio which is both distinct from the relatively
concentrated nature of the market index and has more diverse sources of income,
avoiding overdependence on what proved to be unreliable dividend payers in the
FTSE 100 index.
Andrew Bell
Chairman
9 August 2021
MANAGER'S REPORT
Who are the fund managers of the Company?
Premier Miton Group plc is an independent, listed fund management company,
formed from the merger of Premier Asset Management and Miton Group in November
2019, with a well-established reputation for successfully managing UK-quoted
smaller company portfolios over the longer term. The Company's Board appointed
Miton Group (now Premier Miton Group) as Manager when it was listed in April
2011.
The day-to-day management of the Company's portfolio continues to be carried
out by Gervais Williams and Martin Turner, who came together as a team in April
2011.
Gervais Williams
Gervais joined Miton in March 2011 and is now Head of Equities in Premier
Miton. He has been an equity fund manager since 1985, including 17 years at
Gartmore. He was named Fund Manager of the Year by What Investment? in 2014.
Gervais is also a board member of the Quoted Companies Alliance and a member of
the AIM Advisory Council.
Martin Turner
Martin joined Miton in May 2011. Martin and Gervais have had a close working
relationship since 2004, with complementary expertise that led them to back a
series of successful companies. Martin qualified as a Chartered Accountant with
Arthur Anderson and had senior roles and extensive experience at Merrill Lynch
and Collins Stewart.
What were the main influences on the Company's performance over the year?
The year to May 2021 was a period when share prices around the world continued
to recover after the pandemic setback, often moving towards new highs. Whilst
the FTSE All Share Index total return was 23.1%, the share prices of UK quoted
smallcaps delivered even stronger returns, in part due to reassurance about the
domestic prospects of the UK after the Brexit agreement, and in part because
smallcaps are often immature businesses with prospects that are less reliant on
global growth. The total return of the FTSE SmallCap Index (excluding
investment companies) index was 69.3% and the FTSE AIM All Share Index was
44.6%.
Whilst economic conditions were challenging for many companies during the
global pandemic, for some the relatively abrupt changes in customer behaviour
enhanced their prospects. CMC Markets, the Contract for Differences trading
business for example, enjoyed very strong trading conditions over the year to
May 2021, and greatly increased its profits and dividend payments. CMC Markets
was the largest contributor over the year under review, adding 3.5% to the
return of the Company.
The second best contributor was K3 Capital, a multi-disciplinary group of
professional services businesses advising small to medium enterprises on
matters such as Mergers and Acquisitions. Although volumes were weak at this
time last year, K3 Capital scaled up its operations via two complementary
acquisitions at a time when corporate valuations were low. Subsequently, as SME
transactions have recovered, the combined business has gone on to generate much
greater cash surpluses than previously anticipated. K3 Capital enhanced the
return of the Company by 1.9%.
The holdings in 888 Holdings, Kenmare Resources and Strix Group contributed
over 1.0% each to the Company's returns in the period under review.
The portfolio holding that most detracted from the Company's return during the
year was Manolete. Its share price had performed strongly in previous years, as
it helped insolvent businesses fund past legal cases. This business has found
it more difficult over the pandemic as there have been fewer court sittings.
Much of the holding was sold early in the period, and it was sold entirely by
the year end. Another disappointing holding was Centamin, a gold miner which
was obliged to mine some lesser grade ore due to safety concerns on its planned
operations. In our view, Centamin will mine the higher grade ore in future
years so the holding has been increased during a time when the share price was
weak, in anticipation of future dividend growth. Together these holdings
detracted 1.7% from returns in the year.
Overall, the Company's NAV total return over the year was 38.4%, which compares
favourably with the return of the FTSE All Share Index.
Why has the Company paid shareholders a dividend that exceeds the revenue per
share again this year?
Last year, the Company's revenue per share fell 17% as numerous UK quoted
companies cut or ceased to pay their dividends at the onset of the global
pandemic. Whilst some companies that passed their dividends in the previous
year have resumed dividend payments this year, the overall dividend income from
the UK stock market is still very much lower than it was previously.
In contrast, this year the Company's revenue per share has almost matched that
of the year to May 2019. In part this reflects superior stock selection where
many portfolio holdings have now resumed dividends after they cut them last
year. Alongside, some portfolio companies such as CMC Markets and K3 Capital
have paid much larger dividends than in previous years. In addition, the
Company took a major cash profit on a FTSE 100 Put option during the stock
market setback in March 2020, and hence at the start of the year under review,
it had new capital to invest in additional income shares at a time when their
share prices were weak.
Last year, the Board underlined its confidence in the prospect for an
improvement in the Company's revenue per share this year, by recommending a
slight increase in the final dividend, even though the distribution needed to
use a part of the past revenue reserves. This year, the revenue per share
almost covers the Company's current dividend, and the Trust does not need to
draw upon capital to fund the dividend shortfall. Whilst there may not be such
a marked improvement in the revenue per share in the coming year, the Board has
concluded that the present dividend to shareholders is sustainable. On that
basis they have indicated their confidence again by recommending a slight
increase in the final dividend, using a modest sum from the past revenue
reserves.
What are the main factors that have driven the Company's returns since it first
listed in April 2011?
Over the ten years and one month since the Company was first listed in April
2011, central banks have injected plentiful economic stimulus, often via
Quantitative Easing. Over time, this has driven up the valuation of all assets,
with the price of UK 10-year government bonds rising so that they now yield
just 0.6% per annum compared with 3.5% ten years ago. Hence, global stock
markets have generally delivered good returns over the last 10 years, despite
the impact of the global pandemic.
Even with the uncertainties regarding the UK's negotiation of its exit from the
EU after the Brexit referendum, the total return on the FTSE All Share Index
since April 2011 was 83.0%. The UK stock market has greater potential to add
value than many others, as it has such a large universe of smallcap quoted
companies, which have greater scope to grow and are less efficiently valued.
Over the period since the Company's issue, the FTSE SmallCap Index (excluding
Investment Companies) has delivered a total return of 202.2%.
Even so, not all quoted smallcap share prices have performed as strongly, as
the total return on the FTSE AIM All Share Index was 52.9%, which is actually
rather less than the return of the FTSE All Share Index. All this underlines
why a multicap approach as used by the Company, needs to be actively managed.
This offers scope for the investment managers to participate in many of the
equity income smallcaps that outperform, and hopefully avoid, many of those
that do not. The Company's strategy of seeking quoted companies that are
well-positioned to generate abnormal cash surpluses has delivered significant
added value due to superior stock selection over the period. The NAV total
return on the Diverse Income Trust was 239.7% over the period, well ahead of
the comparatives.
Total Returns since inception %
The Diverse Income Trust Plc - Ordinary 239.75
Shares
FTSE All-Share 83.03
FTSE Small Cap Ex Investment Trusts 202.19
FTSE AIM All-Share 52.92
How is the climate change agenda reflected in the Company's portfolio?
Whilst some fund strategies are dedicated to investing solely in low-carbon
companies that are already close to meeting the climate change agenda, the
interconnected nature of the corporate world means that many of these still
have a reliance on others that are less well aligned. Specifically, we believe
that the financial markets have a major role in actively engaging with the
less-aligned companies. Each needs to make an assessment of its current carbon
footprint and then plan to steadily reduce it in future. Evolving a business
towards a zero carbon future, will involve very substantial investment, so
access to capital will be an important component of these plans.
As managers of The Diverse Income Trust we have a long history of actively
highlighting areas of potential hazard with the management teams of quoted
companies, so that they can be considered, and the risks moderated. In that
regard, we actively quiz management teams as to how they are planning to
address the climate change agenda, and often give best practice examples of
others' actions. This strategy does involve engaging with some that currently
have poor metrics, on the basis that reductions in the carbon footprints of
these kinds of companies are needed for the UK economy as a whole to meet its
zero carbon commitment.
The way we see it, many of the current activities of businesses will either
become unviable as the costs of carbon emissions becomes prohibitive, or
customer preferences will change and lead to a major decline in demand. Thus,
all companies will need to embrace change and step up investment, so they
remain sustainable in all senses of the word. For some, moving ahead of others
may offer commercial advantage, and hence enhanced returns. Conversely, some
may misjudge how quickly others respond, and carry additional downside risks.
The bottom line is that the Company's portfolio does have shareholdings in all
sorts of businesses that need to change to meet the climate change agenda. In
our view, their willingness to invest, and shareholders' willingness to fund
that investment, will help them succeed in addressing the climate change
agenda. This progress will not only actively assist the UK to become a
low-carbon economy, but also, ultimately, to deliver ongoing returns to
investors.
What impact would a sustained pick up in global inflation have on the Company?
After the surge of economic stimulus following the global pandemic, all sorts
of industry bottlenecks have occurred and there are renewed inflationary
pressures. At this stage, it is unknown whether the rise in inflation will
prove to be temporary or persistent in nature.
If inflation did prove to be more persistent, then the yields of long-dated
bonds might rise, and weigh on the valuations of all assets, including stock
markets. This would make it harder for all investment strategies to deliver
capital gains, and investor returns might become more reliant on assets that
delivered a part of their return via income, like that of the Diverse Income
Trust.
Furthermore, if inflation were sustained, then it might greatly reduce the
scope for central banks or governments to inject economic stimulus in future
and, ultimately, put more companies at risk of insolvency. Listed stocks, with
their access to external capital, tend to be much more resilient than private
companies because their capital structures tend to be principally financed by
risk capital rather than debt. Furthermore, if insolvencies were to rise,
quoted companies can acquire previously over-borrowed, but otherwise viable,
businesses from the receiver. These kinds of acquisitions often bring
additional skilled staff and the prospect of generating additional cash
returns, which further boosts the returns of the acquirers at a time when most
other assets are not delivering much return. This pattern of enhanced returns
can be even more dramatic for quoted smallcaps, as sometimes low-cost
acquisitions from the receivers can be transformative to their prospects.
Overall, a sustained increase in inflation would make it harder for nearly all
assets to deliver returns as good as those of recent decades. Although The
Diverse Income Trust might not deliver returns as strong as those of the last
ten years if market trends were to change, it is anticipated that the Company's
multicap, equity income strategy could outperform a wider range of strategies
than previously.
How unusual is the multicap investment universe of the UK stock markets?
Prior to the long period of globalisation, returns on mainstream stock markets
were often not much higher than that of underlying inflation. At that time,
institutions actively allocated capital to quoted smallcaps because they needed
access to the premium returns they offered.
During the period of globalisation, asset returns of all kinds have been
unusually plentiful, so institutional interest in quoted smallcap strategies
has been crowded out by larger weightings in long-duration assets such as the
US technology stocks. Meanwhile, many quoted smallcap exchanges around the
world have closed over recent decades, for lack of institutional interest.
In contrast to others, the UK stock market has retained a vibrant smallcap
exchange due to dedicated tax exemptions, because the UK Government favours the
fact that these businesses generate additional skilled employment and increased
productivity compared with the mainstream companies, and ultimately that they
pay much tax take locally. Hence, the UK stock market differs from others in
still retaining a genuine multicap investment universe, not only including
numerous quoted mainstream stocks, but also a plentiful universe of quoted
smallcaps, with business operating across a very wide range of industry
sectors.
In summary, whilst the prospects for the UK economy may not differ much from
others, the multicap investment universe of UK stock exchanges is almost
unique. If market trends were to change, and if investors were to seek
diversification away from strategies that perform well when bond valuations are
rising, then the UK stock market would be well-placed to attract much greater
institutional allocations.
What are the prospects for the Company?
As the yield on government debt has progressively fallen over recent decades,
it has been a tailwind for asset prices of all kinds. Long-dated bonds have
outperformed, with the longest dated often outperforming the most. Within
equities, US technology stocks, whose valuation is significantly boosted by
higher bond prices, have tended to appreciate quicker than most others.
Whilst numerous business are reporting excellent order books at present, many
are also juggling these with all sorts of supply bottlenecks. Importantly in
our view, many investors assume that the current industry bottlenecks are
transitory. This comfortable position was reinforced over the first half of the
year by the ongoing appreciation of global assets. The significant degree to
which the stock market appreciation was fuelled by the running down the US
Government's cash surplus, and the ongoing Quantitative Easing policy is
largely overlooked.
We are concerned that market liquidity could narrow in future, and new risks
might emerge such as the US Senate starting to game the forthcoming budget
ceiling negotiations. Alongside, the global recovery in the first half was
smoothed by the running down of global inventories. Unfortunately, we are
worried that the component and staffing problems will persist, and the global
economy could struggle to even sustain the output of the first half of 2021.
When this is set in the context of a stock market where corporate valuations
are already standing at very elevated levels, even a slight reduction in market
liquidity could lead to a pullback in stock market valuations. In recent weeks,
a FTSE100 Put with an exercise level of 6,200 and a term to December 2022 has
been purchased, covering 38% of the current portfolio value.
The bottom line is that after some decades of importing deflation, the current
bottlenecks have changed the dynamic. If this pattern persists, as we fear it
might, then investors will start to reweight their holdings away from popular
US technology stocks to reallocate toward equity holdings with reliable surplus
cash generation, albeit that they might have lesser growth prospects. In this
regard, the UK stock market with its multicap universe including major
companies paying good and growing dividends, along with younger smallcaps that
often serve immature industry sectors, is well placed to participate.
Overall, whatever the outcome regarding these near-term worries, we believe the
Diverse Income Trust strategy will continue to be better placed than most
others. Should the past market trends return, then the Diverse Income Trust may
continue to be one of the better performing strategies in its peer group, as it
has been over the last ten years. Conversely, if market trends are changing,
then a UK multicap income investment universe might outperform others,
including other stock markets such as the US.
Gervais Williams and Martin Turner
9 August 2021
PORTFOLIO INFORMATION
AS AT 31 MAY 2021
Sector & Valuation % of Yield1
Rank Company main activity £000 net assets %
1 CMC Markets Financials 15,820 3.7 4.4
2 K3 Capital2 Financials 10,390 2.4 1.8
3 Kenmare Basic Materials 8,881 2.1 1.7
Resources
4 888 Consumer 8,300 1.9 3.2
Discretionary
5 Strix2 Industrials 7,556 1.8 2.6
6 Legal & General Financials 6,025 1.4 6.2
7 Just Financials 5,977 1.4 -
8 National Grid Utilities 5,544 1.3 5.0
9 Intermediate Financials 5,529 1.3 2.5
Capital
10 MAN Financials 5,421 1.3 3.1
Top 10 investments 79,443 18.6
11 Randall & Financials 5,371 1.3 5.0
Quilter2
12 Amino Telecommunications 5,342 1.2 1.3
Technologies2
13 Sainsbury (J) Consumer Staples 5,234 1.2 4.0
14 DRAX Utilities 5,213 1.2 3.9
15 Morrison (WM) Consumer Staples 5,205 1.2 3.9
Supermarkets
16 Diversified Energy 5,173 1.2 10.7
Energy2
17 FRP Advisory2 Industrials 5,142 1.2 2.2
18 Direct Line Financials 5,066 1.2 7.4
Insurance
19 Inspiration Health Care 5,065 1.2 0.4
Healthcare2
20 Phoenix Financials 5,056 1.2 6.5
Top 20 investments 131,310 30.7
21 Blackbird2 Technology 5,055 1.2 -
22 Admiral Financials 5,053 1.2 4.0
23 Smurfit Kappa Industrials 4,914 1.1 2.7
24 DWF Industrials 4,786 1.1 2.1
25 AVIVA Financials 4,712 1.1 5.1
26 Sabre Insurance Financials 4,704 1.1 4.2
27 iEnergizer2 Industrials 4,605 1.1 4.6
28 AO World Consumer 4,594 1.1 -
Discretionary
29 BT Telecommunications 4,585 1.1 -
30 Pan African Basic Materials 4,515 1.0 3.0
Resources2
Top 30 investments 178,833 41.8
31 Centamin Basic Materials 4,350 1.0 6.8
32 Rio Tinto Basic Materials 4,333 1.0 4.9
33 Bloomsbury Consumer 4,320 1.0 2.5
Publishing Discretionary
34 XPS Pensions Financials 4,301 1.0 5.0
35 Persimmon Consumer 4,290 1.0 3.5
Discretionary
36 Jadestone Energy Energy 4,213 1.0 -
37 Polymetal Basic Materials 4,179 1.0 5.4
International
38 Forterra Industrials 4,134 1.0 1.0
39 M&G Financials 4,114 1.0 7.5
40 Concurrent Technology 4,088 0.9 2.8
Technologies2
Top 40 investments 221,155 51.7
Balance held in 88 equity 191,413 44.8
investments
Total equity investments 412,568 96.5
600 Group 8% Convertible Loan Notes 14/02/20223 2,255 0.5
Fixed interest investments 2,255 0.5
Total investment portfolio 414,823 97.0
Other net current assets 12,819 3.0
Net assets 427,642 100.0
A copy of the latest month end top 20 holdings may be found on the Company's
website, www.diverseincometrust.com.
1 Source: Refinitiv. Dividend yield based upon historic dividends and therefore
not representative of future yield and includes special dividends where known.
2 AIM/NEX listed.
3 Bermuda Stock Exchange listed
Portfolio exposure by sector £414.8 million
%
Financials 31.3
Industrials 15.8
Basic Materials 11.4
Consumer Discretionary 9.6
Energy 7.6
Consumer Staples 5.8
Telecomms 3.9
Health Care 3.4
Technology 3.2
Real Estate 3.2
Utilities
2.7
Oil & Gas 1.6
Fixed interest 0.5
100.0
Actual income by sector £15.5 million
%
Financials 40.0
Industrials 14.5
Basic Materials 12.4
Consumer Discretionary 6.2
Energy 5.8
Consumer Staples 5.3
Utilities 3.5
Oil & Gas 2.9
Telecomms 2.5
Fixed Interest 2.5
Real Estate 2.3
Health Care 1.1
Technology 1.0
100.0
Portfolio by asset allocation £414.8
million
%
AIM/NEX Exchanges 35.3
FTSE 100 Index 23.5
FTSE 250 Index 21.8
FTSE SmallCap Index 14.0
Other 2.9
FTSE Fledgling Index 1.3
International Equities 0.7
Fixed Interest 0.5
100.0
Portfolio by spread of investment £15.5 million
income
%
FTSE 100 Index 32.7
FTSE 250 Index 30.4
AIM/NEX Exchanges 19.7
FTSE SmallCap Index 6.3
Other 3.9
International Equities 2.9
Fixed Interest 2.5
FTSE Fledgling Index 1.6
100.0
Source: Thomson Reuters.
The London Stock Exchange ("LSE") assigns all UK-quoted companies to an
industrial sector and frequently to a stock market index. The LSE also assigns
industrial sectors to many international quoted equities as well, and those
that have not been classified by the LSE have been assigned as though they had.
The portfolio as at 31 May 2021 is set out in some detail above, in line with
that included in the Balance Sheet. The income from investments above comprises
all of the income from the portfolio as included in the Income Statement for
the year ended 31 May 2021. The AIM and NEX markets are both UK exchanges
specifically set up to meet the requirements of smaller listed companies.
The first two bars above determine the overall sector weightings of the
Company's capital at the end of the year and with regard to the income received
by the Company over the year. The second pair of bars illustrates the LSE stock
market index within which portfolio companies sit and the source of the income
received by the Company over the year.
Investments for the Company's portfolio are principally selected on their
individual merits. As the portfolio evolves, the Investment Manager
continuously reviews the portfolio's overall sector and index balance to ensure
that it remains in line with the underlying conviction of the Investment
Manager. The Investment Policy is set out below and details regarding risk
diversification and other policies are set out each year in the Annual Report.
A Summary of the Total Costs Involved in Managing Diverse
Investment trusts differ from some other forms of collective funds in that they
are set up as independent corporations with their operations overseen by a
board that is separate from and independent of the fund management group that
manages the capital. In addition, they are listed, with their shares traded on
an approved exchange - which, in our case, is the LSE.
Running costs are deducted from the total assets of the Group on a pro-forma
basis so the NAV published each day is expressed after costs. The figures below
are the costs paid by the Group over the year under review and are expressed as
a percentage of the average asset value of the Group over the year to 31 May
2021 of £359,991,000 (year to 31 May 2020: £346,694,000).
2021 2020
% %
Fund management fees1 0.85 0.86
Administration costs, including Company Secretarial 0.04 0.04
fees
Directors/Auditor/Depositary/Registrar/Custodian and 0.10 0.12
Stockbroker fees
All other direct costs, including VAT on the fees 0.07 0.07
above, plus marketing, legal, printing, insurance and
bank charges
Ongoing charges 1.06 1.09
In addition, the Company also pays transaction charges that are levied when
shares are bought or sold in the portfolio. These are dealing commissions paid
to stockbrokers and stamp duty, a Government tax paid on transactions (which is
zero when dealing on the AIM/NEX exchanges).
2021 2020
% %
Costs paid in dealing commissions 0.03 0.05
Stamp duty, a Government tax on transactions 0.10 0.14
Overall costs including charges on transactions2 1.19 1.28
The overall costs of the Company for the period were 1.19%. This compares with
the Company's average NAV total return since issue of 12.9% per annum (after
the deduction of costs).
1 Fund management fees are tiered and calculated based on the share price, so
may vary in each year. With effect from 1 August 2019, the Manager received a
management fee of 0.9% per annum on the adjusted market capitalisation of the
Company up to £300m, 0.8% per annum on the average market capitalisation
between £300m and £500m and 0.7% per annum on the average market capitalisation
above £500m.
2 Transactions conducted by the Company also involve some loss of value due to
the dealing spread in stock exchange prices. Spreads range from less than 1% in
the most actively traded large cap stocks to more than 3% in the smallest, most
infrequently traded stocks. The exact loss of value is difficult to determine
precisely, but is normally less than half of the dealing spread at the time of
the transaction. In a large percentage of the transactions, especially in the
smallest stocks, the stock is passed through from sizeable seller to sizeable
buyer on a 'put through' basis with potentially no loss of value through the
spread. During the year under review, this cost is believed to be very modest
in comparison to the NAV.
BUSINESS MODEL
Diverse was launched on 28 April 2011. It is registered in England as a public
limited company and is an investment company in accordance with the provisions
of Sections 832 and 833 of the Companies Act 2006.
The principal activity of the Company is to carry on business as an investment
trust. The Company intends at all times to conduct its affairs so as to enable
it to qualify as an investment trust for the purposes of Sections 1158/1159 of
the Corporation Tax Act 2010 ("S1158/1159"). The Directors do not envisage any
change in this activity in the foreseeable future.
The Company has been granted approval from HM Revenue & Customs ("HMRC") as an
investment trust under S1158/1159 and will continue to be treated as an
investment trust company, subject to there being no serious breaches of the
conditions for approval.
The principal conditions that must be met for continuing approval by HMRC as an
investment trust are that the Company's business should consist of "investing
in shares, land or other assets with the aim of spreading investment risk and
giving members of the company the benefit of the results" and the Company may
only retain 15% of its investment income without distributing it as dividend
payments. The Company must also not be a close company. The Directors are of
the opinion that the Company has conducted its affairs for the year ended 31
May 2021 so as to be able to continue to qualify as an investment trust.
The Company's status as an investment trust allows it to obtain an exemption
from paying taxes on the profits made from the sale of its investments and all
other net capital gains.
The Company has a wholly-owned subsidiary, DIT Income Services Limited. The
purpose of the subsidiary is to invest in shorter-term holdings, where the
gains after corporation tax can be passed up to the parent company by way of
dividends, thus improving the position of the Company's revenue account.
Investment Objective
The Company's investment objective is to provide shareholders with an
attractive and growing level of dividends coupled with capital growth over the
long term.
Investment Policy
The Company invests primarily in UK-quoted or traded companies with a wide
range of market capitalisations, but a long-term bias toward small and mid cap
equities. The Company may also invest in large cap companies, including FTSE
100 constituents, where it is believed that this may increase shareholder
value.
The Manager adopts a stock-specific approach in managing the Company's
portfolio and therefore sector weightings will be of secondary consideration.
As a result of this approach, the Company's portfolio will not track any
benchmark index.
The Company may utilise derivative instruments including index-linked notes,
contracts for differences, covered options and other equity-related derivative
instruments for efficient portfolio management, gearing and investment
purposes. Any use of derivatives for investment purposes will be made on the
basis of the same principles of risk spreading and diversification that apply
to the Company's direct investments, as described below. The Company will not
enter into uncovered short positions.
Risk Diversification
Portfolio risk is mitigated by investing in a diversified spread of
investments. Investments in any one company shall not, at the time of
acquisition, exceed 15% of the value of the Company's investment portfolio.
Typically it is expected that the Company will hold a portfolio of between 100
and 180 securities, most of which will represent no more than 1.5% of the value
of the Company's investment portfolio as at the time of acquisition.
The Company will not invest more than 10% of its gross assets, at the time of
acquisition, in other listed closed-ended investment funds, whether managed by
the Manager or not, except that this restriction shall not apply to investments
in listed closed-ended investment funds which themselves have stated investment
policies to invest no more than 15% of their gross assets in other listed
closed-ended investment funds. In addition to this restriction, the Directors
have further determined that no more than 15% of the Company's gross assets
will, at the time of acquisition, be invested in other listed closed-ended
investment funds (including investment trusts) whether or not such funds have
stated policies to invest no more than 15% of their gross assets in other
listed closed-ended investment funds.
Unquoted Investments
The Company may invest in unquoted companies from time to time subject to prior
Board approval. Investments in unquoted companies in aggregate will not exceed
5% of the value of the Company's investment portfolio as at the time of
investment.
Borrowing and Gearing Policy
The Board considers that long-term capital growth can be enhanced by the use of
gearing which may be through bank borrowings and the use of derivative
instruments such as contracts for differences. The Company may borrow (through
bank facilities and derivative instruments) up to 15% of NAV (calculated at the
time of borrowing).
The Board oversees the level of gearing in the Company, and reviews the
position with the Manager on a regular basis.
In the event of a breach of the investment policy set out above and the
investment and gearing restrictions set out therein, the Manager shall inform
the Board upon becoming aware of the same and if the Board considers the breach
to be material, notification will be made to the LSE.
No material change will be made to the investment policy without the approval
of shareholders by ordinary resolution.
Principal Risks and Uncertainties
The Company is exposed to a variety of risks and uncertainties that could cause
its asset price or the income from the investment portfolio to reduce, possibly
by a sizeable percentage in the most adverse circumstances. The Board, through
delegation to the Audit Committee, has undertaken a robust assessment and
review of the emerging and principal risks facing the Company, together with a
review of any new risks which may have arisen during the year, including those
that would threaten its business model, future performance, solvency or
liquidity. These risks are formalised within the Company's risk matrix.
Information regarding the Company's internal control and risk management
procedures can be found in the Corporate Governance Statement in the full
Annual Report. Whilst reviewing the principal risks and uncertainties, the
Board was cognisant of the continued risks posed by the COVID-19 pandemic.
The principal financial risks and the Company's policies for managing these
risks, and the policy and practice with regard to financial instruments are
summarised in note 19 to the financial statements.
The Board has also identified the following principal risks and uncertainties:
Investment and strategy
Risk: There can be no guarantee that the investment objective of the Company
will be achieved.
The Company does not follow any benchmark. Accordingly, the portfolio of
investments held by the Company will not mirror the stocks and weightings that
constitute any particular index or indices, which may lead to the Company's
shares failing to follow either the direction or extent of any moves in the
financial markets generally (which may or may not be to the advantage of
shareholders).
Mitigation: The Manager has in place a dedicated investment management process
which is designed to maximise the chances of the investment objective being
achieved. The Board reviews regular investment and financial reports from the
Manager to monitor this.
Smaller companies
Risk: The Company will invest primarily in quoted UK companies with a wide
range of market capitalisations but a long-term bias toward small and mid cap
equities. Smaller companies can be expected, in comparison to larger companies,
to operate over a narrower range of products, have more restricted depth of
management and a higher risk profile. In addition, the relatively small market
capitalisation of such companies can make the market in their shares less
liquid. Prices of individual smaller capitalisation stocks could be more
volatile than prices of larger capitalisation stocks and the risk of insolvency
of many smaller companies (with the attendant losses to investors) is higher.
Mitigation: The Board looks to mitigate this risk by ensuring the Company holds
a spread of investments, achieved through limiting the size of new holdings at
the time of investment to typically between 1% and 1.5% of the portfolio. All
potential investee companies are researched by the Manager prior to investment.
Sectoral diversification
Risk: The Company is not constrained from weighting to any sector. This may
lead to the Company having significant exposure to portfolio companies from
certain business sectors from time to time. Greater concentration of
investments in any one sector may result in greater volatility in the value of
the Company's investments and consequently its NAV.
Mitigation: The Company seeks to achieve attractive returns by investing in
weightings that are different from the overall market, yet also seeks to ensure
that individual variances are not so extreme as to leave shareholders at risk
of portfolio volatility that is unreasonably poor. Even though there may be
significant exposures to a single sector, this will be achieved by holding a
number of different stocks in the portfolio.
Dividends
Risk: The Company's investment objective includes the aim of providing
shareholders with an attractive and growing dividend. There is no guarantee
that any dividends will be paid in respect of any financial year or period. The
ability to pay dividends is dependent on a number of factors, including the
level of dividends earned from the portfolio and the net revenue profits
available for that purpose.
The redemption of shares pursuant to the redemption facility may also reduce
distributable reserves to the extent that the Company is unable to pay
dividends.
Mitigation: The Company maintains accounting records and produces forecasts
that are designed to reduce the likelihood that the Company will not have
sufficient distributable resources to meet its dividend objective.
The pandemic has caused the Trust's dividend income to drop but there remain
sufficient reserves for the Trust to maintain its dividend policy.
Share price volatility and liquidity/marketability risk
Risk: The market price of the Company's shares, like shares in all investment
companies, may fluctuate independently of the NAV and thus may not reflect the
underlying NAV of the shares. The shares could trade at a discount or premium
to NAV at different times, depending on factors such as supply and demand for
the shares, market conditions and general investor sentiment.
Mitigation: The Company has in place an annual redemption facility whereby
shareholders can voluntarily tender their shares. The Board monitors the
relationship between the share price and the NAV. The Company has taken powers
to re-purchase shares should there be a sustained imbalance in the supply and
demand leading to a discount. The Company has powers to issue shares (only at a
premium to NAV) should there be good investment opportunities and the size of
the Company has not become too large to continue to meet its objectives.
Gearing
Risk: The Company's investment strategy may involve the use of gearing to
enhance investment returns, which exposes the Company to risks associated with
borrowings. Gearing may be generated through the use of options, futures,
options on futures, swaps and other synthetic or derivative financial
instruments. Such financial instruments inherently contain much greater
leverage than a non-margined purchase of the underlying security or instrument.
While the use of borrowings should enhance the total return on the shares where
the return on the Company's underlying assets is rising and exceeds the cost of
borrowing, it will have the opposite effect where the return on the Company's
underlying assets is rising at a lower rate than the cost of borrowing or
falling, further reducing the total return on the shares.
As a result, the use of borrowings by the Company may increase the volatility
of the NAV per share.
Mitigation: The Company has a revolving loan facility in place, as detailed in
note 5 to the financial statements. The facility has been put in place to offer
the Company the opportunity to enhance its performance through the use of
borrowings, when appropriate. However, the facility remained undrawn as at 31
May 2021 and, subsequently, to the date of this report.
The Company is limited to a maximum gearing of 15% of the net assets. There was
no gearing as at 31 May 2021 (2020: nil).
Key man risk
Risk: The Company depends on the diligence, skill, judgement and business
contacts of the Manager's investment professionals and its future success could
depend on the continued service of these individuals, in particular Gervais
Williams.
Mitigation: The Company is managed by a team of two at Premier Miton, Gervais
Williams and Martin Turner, and this moderates the key man risk were one or the
other to leave Premier Miton's employment. Furthermore, the Company may
terminate the Management Agreement should Gervais Williams cease to be an
employee of the Manager's group and is not replaced by a person whom the
Company considers to be of equal or satisfactory standing within three months
of his departure.
Engagement of third party service providers
Risk: The Company has no employees and the Directors have all been appointed on
a non-executive basis. Whilst the Company has taken all reasonable steps to
establish and maintain adequate procedures, systems and controls to enable it
to comply with its obligations, the Company is reliant upon the performance of
third party service providers for its executive function.
Mitigation: The Company operates through a series of contractual relationships
with its service providers. These contracts, supported by service level
agreements where appropriate, set out the terms on which a service is to be
provided to the Company. The Board reviews performance of all the service
providers both in the Board meetings and in the Management Engagement Committee
meetings, where the terms on which the service providers are engaged are also
reviewed. The Board also receives assurance or internal controls reports from
key service providers. In addition, the contracts provide the Company with
protection in the event of failure to perform by a service provider.
The Board considered the impact of the pandemic on each of the service
providers, including the Manager, and found them all to be operating
effectively.
SHARE CAPITAL
The Company's share capital consists of redeemable ordinary shares of 0.1p each
with one vote per share and non-voting management shares of £1 each. From time
to time, the Company may issue C ordinary shares of 1p each with one vote per
share.
The Company's shares have the following rights:
Voting: the ordinary and C shares have equal voting rights. At shareholder
meetings, members present in person or by proxy have one vote on a show of
hands and on a poll have one vote for each share held. Management shares are
non-voting.
Dividends: the assets of the ordinary and C shares are separate and each class
is entitled to dividends declared on their respective asset pool. The
management shares are entitled to receive, in priority to the holders of any
other class of shares, a fixed cumulative dividend equal to 0.00001p per annum.
Capital: if there are any C shares in issue, the surplus capital and assets of
the Company shall, on a winding-up or on a return of capital, be applied
amongst the existing ordinary shareholders and the management shareholders pro
rata according to the nominal capital paid up on their holdings after having
deducted therefrom an amount equivalent to the assets and liabilities relating
to the C shares, which amount shall be applied amongst the C shareholders pro
rata according to the nominal capital paid up on their holdings of C shares.
When there are no C shares in issue, any surplus shall be divided amongst the
ordinary shareholders and management shareholders pro rata according to the
nominal capital paid up on their holdings of ordinary shares and management
shares.
In each instance, the holders of the management shares shall only receive an
amount up to the capital paid up on such management shares and the management
shares shall not confer the right to participate in any surplus remaining
following payment of such amount.
As at the date of this Report, there were 361,445,105 ordinary shares in issue,
none of which were held in treasury, and 50,000 management shares. The Company
has a redemption facility through which shareholders are entitled to request
the redemption of all or part of their holding of ordinary shares on an annual
basis on 31 May in each year.
The Board may, at its absolute discretion, elect not to operate the annual
redemption facility in whole or in part, although it has indicated that it is
minded to approve all requests.
Further details of the capital structure can be found in note 9 to the
financial statements.
Share Issues
At the AGM held on 14 October 2020, the Directors were granted authority to
allot ordinary shares up to an aggregate nominal amount of £35,804 (being
approximately 10% of the issued ordinary share capital). This authority is due
to expire at the Company's AGM on 20 October 2021.
The Company has a block listing of ordinary shares to be listed to the premium
segment of the Official List of the FCA and admitted to trading on the premium
segment of the LSE's main market. During the year ended 31 May 2021, 3,400,000
ordinary shares were issued utilising the block listing, details of which are
provided in the schedule below.
Date Number of shares Price paid per Mid-market price
share
15/04/2021 150,000 1.1675 1.1650
16/04/2021 100,000 1.1725 1.1800
27/04/2021 800,000 1.1775 1.1775
05/05/2021 1,950,000 1.1875 1.1800
12/05/2021 400,000 1.1850 1.1800
Total 3,400,000
Following the period end, on 2 June 2021, the Company applied for and was
granted block listing of a further 26,104,001 shares. As at the year end,
6,299,999 shares remained under the block listing, and as at the date of this
Report the balance was 32,404,000 shares.
A resolution for renewal of the Directors' authority to issue shares will be
proposed at the next AGM.
There are no restrictions concerning the transfer of securities in the Company
or on voting rights; no special rights with regard to control attached to
securities; no agreements between holders of securities regarding their
transfer known to the Company; and no agreements which the Company is party to
that might affect its control following a successful takeover bid.
Purchase of Own Shares
At the AGM held on 14 October 2020, the Directors were granted the authority to
buy back up to 53,670,961 ordinary shares. No ordinary shares have been bought
back under this authority during the year, nor in prior years. The authority
will expire at the next AGM when a resolution for its renewal will be proposed.
Any shares bought back under this authority will not be sold from treasury at a
price lower than the prevailing NAV at that time.
Treasury Shares
Shares bought back by the Company may be held in treasury, from where they
could be re-issued at a premium to NAV quickly and cost effectively. This
provides the Company with additional flexibility in the management of its
capital base. No shares were purchased for, or held in, treasury during the
year or since the year end.
Share Redemptions
Valid redemption requests were received under the Company's redemption facility
for the 28 May 2021 Redemption Point in relation to 347,580 ordinary shares,
representing 0.096% of the issued share capital. All of these shares were
matched with buyers and sold at a Redemption Price of 118.08p per share.
Current Share Capital
As at the year end, there were 361,445,105 ordinary shares and 50,000
management shares (see note 9 to the financial statements) in issue,
representing 99.986% and 0.014% of the total share capital respectively.
SECTION 172 STATEMENT
A discussion of the Company's Stakeholders and how the Directors discharge
their duties to Stakeholders under section 172 of the Companies Act 2006, is
included on pages 22 and 23 of the Annual Report.
MANAGEMENT, SOCIAL, ENVIRONMENTAL AND DIVERSITY MATTERS
Management Arrangements
The Company appointed Premier Portfolio Managers Limited ("PPM" or the
"Manager") as its Alternative Investment Fund Manager ("AIFM") and its Manager,
following the novation of the Appointment of Manager agreement on 24 April
2020. PPM has been approved as an AIFM by the UK's FCA.
The Manager receives a management fee of 0.9% per annum on the average market
capitalisation of the Company up to £300m and 0.8% per annum on the average
market capitalisation between £300m and £500m and 0.7% per annum on the average
market capitalisation above £500m.
In addition to the basic management fee, and for so long as a Redemption Pool
(see note 9 for details) is in existence, the Manager is entitled to receive
from the Company a fee calculated at the rate of one-twelfth of 1.0% per
calendar month of the NAV of the Redemption Pool on the last business day of
the relevant calendar month.
In accordance with the Directors' policy on the allocation of expenses between
income and capital, in each financial year, 75% of the management fee payable
is charged to capital and the remaining 25% to revenue.
The Management Agreement is terminable by either the Manager or the Company
giving to the other not less than 12 months' written notice. The Management
Agreement may be terminated earlier by the Company with immediate effect on the
occurrence of certain events, including the liquidation of the Manager or
appointment of a receiver or administrative receiver over the whole or any
substantial part of the assets or undertaking of the Manager or a material
breach by the Manager of the Management Agreement which is not remedied. The
Company may also terminate the Management Agreement should Gervais Williams
cease to be an employee of the Manager's group and is not replaced by a person
whom the Company considers to be of equal or satisfactory standing within three
months of his departure.
The Company has given certain market standard indemnities in favour of the
Manager in respect of the Manager's potential losses in carrying on its
responsibilities under the Management Agreement.
The Board appointed Bank of New York Mellon as its Depositary and Custodian
under an agreement dated 22 July 2014. The annual fee for depositary services
due to Bank of New York Mellon is 0.02% of gross assets, subject to a minimum
fee of £15,000 per annum. The Company and the Depositary may terminate the
Depositary Agreement with three months' written notice.
Company secretarial and administrative services are provided by Link
Alternative Fund Administrators Limited, under an agreement dated 7 April 2011.
This agreement may be terminated by 12 months' written notice subject to
provisions for earlier termination as provided therein.
Continuing Appointment of the Manager
The Board keeps the performance of the Manager under continual review, and the
Management Engagement Committee conducts an annual appraisal of the Manager's
performance, and makes a recommendation to the Board about the continuing
appointment of the Manager. It is the opinion of the Directors that the
continuing appointment of the Manager is in the interests of shareholders as a
whole. The reasons for this view are that the Manager has executed the
investment strategy according to the Board's expectations and has demonstrated
superior risk-adjusted returns relative to the broader market and the peer
group.
The Directors also believe that by paying the management fee calculated on a
market capitalisation basis, rather than a percentage of assets basis, the
interests of the Manager are more closely aligned with those of shareholders.
Environmental, Human Rights, Employee, Social and Community Issues
Since the Company does not have any employees, the day-to-day management of
these areas is delegated to the Manager. As an investment trust, the Company
has no direct impact on the community or the environment, and as such has no
environmental, human rights, social or community policies.
Environmental, Social and Governance ("ESG") factors are central to the
investment process as misjudgements on these matters can incur major additional
costs to the portfolio holdings, as well as undermining their equity return
through reputational damage. In company meetings, the Manager routinely
questions the corporate management on a variety of topics, such as safety
records and the make-up of their board papers, to ensure companies are adhering
to best practice. These questions can be quite wide ranging. For example, the
Manager has raised issues ranging from the use of antibiotics in livestock, to
how individual companies monitor the working conditions in the overseas plants
of their suppliers.
Diversity
The Board of Directors of the Company comprises two female and three male
Directors.
The Company's Diversity Policy acknowledges the benefits of greater diversity,
including gender diversity, and the Board remains committed to ensuring that
the Company's Directors bring a wide range of skills, knowledge, experience,
backgrounds and perspectives. Details of the Company's Diversity Policy are set
out in the Annual Report.
The Strategic Report has been approved by the Board of Directors.
On behalf of the Board
Andrew Bell
Chairman
9 August 2021
DIRECTORS (ALL NON-EXECUTIVE)
Andrew Bell - Chairman of the Board
Paul Craig
Caroline Kemsley-Pein - Chair of the Management Engagement and Nomination
Committees
Michelle Mcgrade
Calum Thomson - Chairman of the Audit Committee and Senior Independent Director
All Directors are non-executive and are independent of the Manager.
EXTRACTS FROM THE REPORT OF THE DIRECTORS
Results and Dividends
A final dividend of 1.10p is recommended. Subject to shareholder approval at
the forthcoming AGM, this dividend will be payable on 30 November 2021 to
shareholders on the register at close of business on 24 September 2021. The
ex-dividend date will be 23 September 2021. The dividends paid or payable in
respect of the year ended 31 May 2021 are set out in note 8 below.
Going Concern
The Directors consider that it is appropriate to adopt the going concern basis
in preparing the financial statements. After making enquiries, and bearing in
mind the nature of the business and assets of the Company and its subsidiary
("the Group"), the Directors consider that the Group has adequate resources to
continue in operational existence for the foreseeable future. In arriving at
this conclusion, the Directors have considered the liquidity of the portfolio
and the Group's ability to meet obligations as they fall due for a period of at
least 12 months from the date that these financial statements were approved.
In making the assessment, the Directors have considered the likely impacts of
the ongoing COVID-19 pandemic on the Company, operations and portfolio.
Cash flow projections have been reviewed and show that the Group has sufficient
funds to meet both its contracted expenditure and its discretionary cash
outflows in the form of the dividend policy.
Viability Statement
The Directors have assessed the viability of the Company over a three-year
period, taking account of the Company's position and the risks as set out in
the Strategic Report. The period assessed balances the long-term aims of the
Company, the Board's view that the success of the Company is best assessed over
a longer time period and the inherent uncertainty of looking out for too long a
period. The present pandemic has demonstrated the short term volatility of the
stock markets and as a result the board consider it appropriate to continue to
review the viability of the Company over a three year time period which
balances the long term nature of investing against the short term liquidity of
the investments.
As part of its assessment of the viability of the Company, the Board has
considered the emerging and principal risks and uncertainties and the impact on
the Company's portfolio of a significant fall in UK markets. The Directors do
not expect there to be any significant change in the current principal risks
and adequacy of the mitigating controls in place over the period of this
assessment.
To provide this assessment, the Board has considered the Company's financial
position and its ability to liquidate its portfolio to meet its expenses or
other liabilities as they fall due:
* The Company invests largely in companies listed and traded on stock
exchanges. These are actively traded, and whilst perhaps less liquid than
larger quoted companies, the portfolio is well diversified by both number
of holdings and industry sector.
* The expenses of the Company are predictable and modest in comparison with
the assets in the portfolio. There are no commitments that would change
that position.
* ?The Company has an annual redemption facility whereby shareholders may
request that their shares are redeemed at NAV. The Board has considered the
possibility that shareholders holding a significant percentage of the
Company's shares request redemption. Firstly, the Board has flexibility
over the method of redemption so as to avoid disruption to the overall
operation of the Company in this situation. Secondly, the Company's
investments comprise readily realisable securities which can be sold to
meet funding requirements if necessary. The most significant of the
Company's expenses vary in proportion to the size of the Company.
In addition to considering the emerging and principal risks set out above and
the financial position of the Company as described above, the Board has also
considered the following factors:
* the continuing relevance of the Company's investment objective in the
current environment;
* the level of demand for the Company's shares and that since launch, the
Company has been able to issue further shares;
* the gearing policy of the Company; and
* that regulation will not increase to such an extent that the costs of
running the Company become uneconomical.
The Board has reviewed the influence of the COVID-19 pandemic on its service
providers and is satisfied with the ongoing services provided to the Company.
During the year, the Board periodically reviews key stress tests, which are
provided by the Investment Manager and are based on correlations from defined
historical periods to review key sensitivities to pre-determined shocks. The
Investment Manager's Funds Risk Committee and Investment Oversight Committee
review similar sensitivities or stress tests on a quarterly and monthly basis
respectively. Both committees have been satisfied when they last convened that
there were no undue risks or sensitivities of concern for the Trust.
Accordingly, the Directors have formed the reasonable expectation that the
Company will be able to continue in operation and meet its liabilities as they
fall due over the next three years.
Company Culture
The Company's defined purpose is to deliver our investment objective: to pay
shareholders a good and growing dividend income. The Directors believe that
this will be facilitated by establishing and maintaining a healthy corporate
culture among the Board and in its interaction with the Investment Manager,
shareholders and other stakeholders.
The Board strives for its culture to be in line with the Company's purpose,
values and strategy. Whilst ensuring that it does not conflict with the
investment objective, the Board aims to structure the Company's operations in
such a manner that it takes all its stakeholders and the impact of the
Company's operations on the environment and community into account.
In addition, the Board promotes and monitors the effective management or
mitigation of the risks faced by the Company.
As the Company has no employees and acts through its Board and service
providers, its culture is represented by the values and behaviour of those
parties. Accordingly, the Board assesses and takes account of the
organisational effectiveness of its service providers (including "soft" factors
such as openness and teamwork) as well as their regulatory compliance. The
Board is responsible for ensuring that the Company's culture is embedded in its
day to day operations and it has adopted a number of policies and practices to
facilitate this. In recognition of the Company's corporate and social
responsibilities and to safeguard the Company's interests, the Board engages
with the Company's service providers and other stakeholders. As part of this
ongoing monitoring, the board receives reports from its service providers with
respect to their anti-bribery and corruption policies; Modern Slavery Act 2015
statements; equal opportunities and diversity policies; and greenhouse gas and
energy use reporting.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the financial
statements in accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006 and applicable law and
regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors are required to prepare the Group
financial statements in accordance with international accounting standards in
conformity with the requirements of the Companies Act 2006. Under company law
the Directors must not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of affairs of the
Group and Company and of the profit or loss for the Group for that period. The
Directors are also required to prepare financial statements in accordance with
international financial reporting standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union.
In preparing these financial statements, the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgements and accounting estimates that are reasonable and prudent;
* state whether they have been prepared in accordance with international
accounting standards in conformity with the requirements of the Companies
Act 2006, subject to any material departures disclosed and explained in the
financial statements
* state whether they have been prepared in accordance with international
financial reporting standards adopted pursuant to Regulation (EC) No 1606/
2002 as it applies in the European Union, subject to any material
departures disclosed and explained in the financial statements;
* prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business;
* prepare a directors' report, a strategic report and directors' remuneration
report which comply with the requirements of the Companies Act 2006.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
Act 2006 and, as regards the Group financial statements, Article 4 of the IAS
Regulation.
They are also responsible for safeguarding the assets of the Company and hence
for taking reasonable steps for the prevention and detection of fraud and other
irregularities. The Directors are responsible for ensuring that the Annual
Report and accounts, taken as a whole, are fair, balanced, and understandable
and provides the information necessary for shareholders to assess the Group's
performance, business model and strategy.
Website publication
The Directors are responsible for ensuring the Annual Report and the financial
statements are made available on a website. Financial statements are published
on the Company's website in accordance with legislation in the United Kingdom
governing the preparation and dissemination of financial statements, which may
vary from legislation in other jurisdictions. The maintenance and integrity of
the Company's website has been delegated to the Manager, but the Directors'
responsibility extends to the ongoing integrity of the financial statements
contained therein.
Directors' responsibilities pursuant to DTR4
The Directors confirm to the best of their knowledge:
* The financial statements have been prepared in accordance with the
applicable set of accounting standards and Article 4 of the IAS Regulation
and give a true and fair view of the assets, liabilities, financial
position and profit and loss of the Group and Company.
* The Annual Report includes a fair review of the development and performance
of the business and the financial position of the Group and Company,
together with a description of the principal risks and uncertainties that
they face.
On behalf of the Board
Andrew Bell
Chairman
9 August 2021
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's
statutory accounts for the years ended 31 May 2021 and 31 May 2020 but is
derived from those accounts. Statutory accounts for 2020 have been delivered to
the Registrar of Companies, and those for 2021 will be delivered in due course.
The Auditor has reported on those accounts; their report was (i) unqualified,
(ii) did not include a reference to any matters to which the Auditor drew
attention by way of emphasis without qualifying their report and (iii) did not
contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The
text of the Auditor's report can be found on pages 49 to 57 in the Company's
full Annual Report at: www.diverseincometrust.com.
CONSOLIDATED INCOME STATEMENT
Year ended 31 May Year ended 31 May
2021 2020
Notes Revenue Capital Total Revenue Capital Total
Return return £000 Return return £000
£000 £000 £000 £000
Gains(losses) on investments held at fair value through 12 - 106,793 106,793 - (32,881) (32,881)
profit or loss
Foreign exchange losses
- (12) (12) - (33) (33)
Gains on derivatives held at fair value through profit - - - - 13,674 13,674
or loss 13
Income 2 15,472 1,245 16,717 14,101 - 14,101
Management fee 3 (764) (2,293) (3,057) (744) (2,234) (2,978)
Other expenses 4 (761) - (761) (841) - (841)
Return on ordinary activities before finance costs and 13,947 105,733 119,680 12,516 (21,474) (8,958)
taxation
Finance costs 5 (28) (85) (113) (28) (82) (110)
Return on ordinary activities before taxation 13,919 105,648 119,567 12,488 (21,556) (9,068)
Taxation - irrecoverable withholding tax 6 (539) - (539) (67) - (67)
- prior years recoverable withholding - - - (59) - (59)
tax now irrecoverable
Return on ordinary activities after taxation 7 13,380 105,648 119,028 12,362 (21,556) (9,194)
Return per Ordinary share - basic and diluted (pence) 7 3.73 29.43 33.16 3.27 (5.70) (2.43)
The total column of this statement is the Income Statement of the Group
prepared in accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006 and in accordance with
International Financial Reporting Standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union ("IFRSs"). The supplementary
revenue return and capital return columns are presented in accordance with the
Statement of Recommended Practice issued by the Association of Investment
Companies ("AIC SORP").
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued during the year.
There is no other comprehensive income, and therefore the return on ordinary
activities after tax is also the total comprehensive income.
The notes below form part of these financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Share Capital
Share premium redemption Special Capital Revenue
Capital account reserve Reserve reserve Reserve Total
Group Notes £000 £000 £000 £000 £000 £000 £000
As at 1 June 428 192,562 6 40,530 87,443 15,041 336,010
2020
Total
comprehensive
income:
Net return for - - - - 105,648 13,380 119,028
the year
Transactions
with
shareholders
recorded
directly to
equity:
Issue of 3 4,000 - - - - 4,003
ordinary shares
Shares bought (20) - 20 (18,152) - - (18,152)
back and
cancelled
Equity dividends 8 - - - - - (13,247) (13,247)
paid
As at 31 May 411 196,562 26 22,378 193,091 15,174 427,642
2021
Share Capital
Share premium redemption Special Capital Revenue
Capital account reserve reserve Reserve Reserve Total
Group Notes £000 £000 £000 £000 £000 £000 £000
As at 1 June 434 192,562 - 45,775 108,999 17,470 365,240
2019
Total
comprehensive
income:
Net return for - - - - (21,556) 12,362 (9,194)
the year
Transactions
with
shareholders
recorded
directly to
equity:
Shares bought (6) - 6 (5,245) - - (5,245)
back and
cancelled
Equity dividends 8 - - - - - (14,791) (14,791)
paid
As at 31 May 428 192,562 6 40,530 87,443 15,041 336,010
2020
The notes below form part of these financial statements.
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
Share Capital
Share Premium redemption Special Capital Revenue
capital Account reserve Reserve reserve reserve Total
Company Notes £000 £000 £000 £000 £000 £000 £000
As at 1 June 2020 428 192,562 6 40,530 87,443 14,056 335,025
Total comprehensive income:
Net return for the year - - - - 105,648 13,469 119,117
Transactions with shareholders recorded directly
to equity:
Issue of ordinary shares 3 4,000 - - - - 4,003
Shares bought back and cancelled (20) - 20 (18,152) - - (18,152)
Equity dividends paid 8 - - - - - (13,247) (13,247)
As at 31 May 2021 411 196,562 26 22,378 193,091 14,278 426,746
Share Capital
Share premium redemption Special Capital Revenue
capital account reserve reserve reserve Reserve Total
Company Notes £000 £000 £000 £000 £000 £000 £000
As at 1 June 2019 434 192,562 - 45,775 108,999 16,570 364,340
Total comprehensive income:
Net return for the year - - - - (21,556) 12,277 (9,279)
Transactions with shareholders recorded directly
to equity:
Shares bought back and cancelled (6) - 6 (5,245) - - (5,245)
Equity dividends paid 8 - - - - - (14,791) (14,791)
As at 31 May 2020 428 192,562 6 40,530 87,443 14,056 335,025
The notes below form part of these financial statements.
CONSOLIDATED AND PARENT COMPANY BALANCE SHEETS
Group Group Company Company
Notes 31 May 2021 31 May 2020 31 May 2021 31 May 2010
£000 £000 £000 £000
Non-current assets:
Investments held at fair value through profit or loss 12 414,823 310,398 414,823 310,398
Current assets:
Trade and other receivables 16 1,877 2,717 1,877 2,717
Cash and cash equivalents 11,379 25,816 11,332 25,816
13,256 28,533 13,209 28,533
Current liabilities:
Trade and other payables 17 (437) (2,921) (1,286) (3,906)
(437) (2,921) (1,286) (3,906)
12,819 25,612 11,923 24,627
Net current assets
Total net assets 427,642 336,010 426,746 335,025
Capital and reserves:
Share capital - ordinary shares 9 361 378 361 378
Share capital - management shares 9 50 50 50 50
Share premium account 10 196,562 192,562 196,562 192,562
Capital redemption reserve 10 26 6 26 6
Special reserve 10 22,378 40,530 22,378 40,530
Capital reserve 10 193,091 87,443 193,091 87,443
Revenue reserve 10 15,174 15,041 14,278 14,056
Shareholders' funds 427,642 336,010 426,746 335,025
pence pence
Net asset value per ordinary share 11 118.31 88.82
The Directors have applied the exemption under Companies Act 2006 s408 allowing
the parent company's individual income statement to be omitted from the
accounts where group accounts have been prepared. The amount of the Company's
return for the financial year is a gain after tax of £119,117,000 (2020: loss
of £9,279,000).
These financial statements were approved and authorised for issue by the Board
of The Diverse Income Trust plc on 9 August 2021 and were signed on its behalf
by:
Andrew Bell
Chairman
Company No: 7584303
The notes below form part of these financial statements.
CONSOLIDATED AND PARENT COMPANY CASH FLOW STATEMENTS
Group Group Company Company
31 May 31 May 31 May 31 May
2021 2020 2021 2020
£000 £000 £000 £000
Operating activities:
Net return before taxation 119,567 (9,068) 119,656 (9,153)
(Gains)/losses on investments and (106,793) 19,207 (106,793) 19,207
derivatives held at fair value through
profit or loss
Finance costs 113 112 113 112
Decrease in trade and other receivables 441 76 441 76
Increase/(decrease) in trade and other 67 (33) (69) 52
payables
Withholding tax paid (539) (126) (539) (126)
Net cash inflow from operating activities 12,856 10,168 12,809 10,168
Investing activities:
Purchase of investments (114,655) (138,046) (114,655) (138,046)
Sale of investments 114,872 126,360 114,872 126,360
Sale of derivative instruments - 19,987 - 19,987
Net cash inflow from investing activities 217 8,301 217 8,301
Financing activities:
Ordinary shares issued 4,003 - 4,003 -
Cancellation of shares (18,152) (5,245) (18,152) (5,245)
Revolving credit facility arrangement fee (20) (20) (20) (20)
paid
Revolving credit facility non-utilisation (93) (92) (93) (92)
fee paid
Equity dividends paid (13,248) (14,791) (13,248) (14,791)
Net cash outflow from financing (27,510) (20,148) (27,510) (20,148)
Decrease in cash and cash equivalents (14,437) (1,679) (14,484) (1,679)
Reconciliation of net cash flow movements
in funds:
Cash and cash equivalents at the start of 25,816 27,495 25,816 27,495
the year
Net cash outflow from cash and cash (14,437) (1,679) (14,484) (1,679)
equivalents
Cash and cash equivalents at the end of the 11,379 25,816 11,332 25,816
year
Cash and cash equivalents comprise the
following:
Cash at bank 11,379 25,816 11,332 25,816
11,379 25,816 11,332 25,816
The notes below form part of these financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 General Information and Significant Accounting Policies
The Diverse Income Trust plc is a company incorporated and registered in
England and Wales. The principal activity of the Company is that of an
investment trust company within the meaning of Sections 1158/1159 of the
Corporation Tax Act 2010.
The financial statements of the Group and parent company have been prepared in
accordance with international accounting standards in conformity with the
requirements of the Companies Act 2006 and in accordance with International
Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002
as it applies in the European Union ('IFRSs').
Basis of Preparation
The principal accounting policies adopted are set out below. The annual
financial statements have also been prepared in accordance with guidance issued
by the AIC.
The financial statements are presented in sterling, which is the Group's
functional currency as the UK is the primary environment in which it operates,
rounded to the nearest £'000, except where otherwise indicated.
Going Concern
The financial statements have been prepared on a going concern basis and on the
basis that approval as an investment trust company will continue to be met.
The Directors have made an assessment of the Company's ability to continue as a
going concern and are satisfied that the Company has adequate resources to
continue in operational existence for a period of at least 12 months from the
date when these financial statements were approved. In making the assessment,
the Directors have considered the likely impacts of the current COVID-19
pandemic on the Company, operations and the investment portfolio.
The Directors noted that the Company, with the current cash balance and holding
a portfolio of listed investments, is able to meet its obligations as they fall
due. The current cash balance plus available additional borrowing, through the
revolving credit facility, enables the Company to meet any funding requirements
and finance future additional investments. The Company is a closed-end fund,
where assets are not required to be liquidated to meet day to day redemptions.
The Directors have completed stress tests assessing the impact of changes in
market value and income with associated cash flows. In making this assessment,
they have considered plausible downside scenarios. These tests were driven by
the possible effects of continuation of the COVID-19 pandemic but, as an
arithmetic exercise, apply equally to any other set of circumstances in which
asset value and income are significantly impaired. The conclusion was that in a
plausible downside scenario the Company could continue to meet its liabilities.
Whilst the economic future is uncertain, and the Directors believe that it is
possible the Company could experience further reductions in income and/or
market value, the opinion of the Directors is that this should not be to a
level which would threaten the Company's ability to continue as a going
concern.
The Directors, the Investment Manager and other service providers have put in
place contingency plans to minimise disruption. Furthermore, the Directors are
not aware of any material uncertainties that may cast significant doubt on the
Company's ability to continue as a going concern, having taken into account the
liquidity of the Company's investment portfolio and the Company's financial
position in respect of its cash flows, borrowing facilities and investment
commitments (of which there are none of significance). Therefore, the financial
statements have been prepared on the going concern basis.
Basis of Consolidation
IFRS 10 sets out the principles for the presentation and preparation of
consolidated financial statements and establishes a single control model that
applies to all entities.
The Company has made the significant accounting judgement that the Company
meets the definition of an investment entity. However, the Company's
wholly-owned subsidiary, DIT Income Services Limited, is an extension of the
Company through which it provides services that relate to the investment
entity's investment activities and the subsidiary is not itself an investment
entity. The Group financial statements therefore consolidate the financial
statements of the Company and its subsidiary, drawn up to 31 May 2021. The
subsidiary is consolidated from the date of acquisition, being the date on
which control was obtained, and will continue to be consolidated until the date
that such control ceases. Control comprises being exposed, or having rights, to
variable returns through its power over the investee. The financial statements
of the subsidiary are prepared for the same reporting year as the parent
Company, using consistent accounting policies. All inter-company balances and
transactions, including unrealised profits arising from them, are eliminated.
As permitted by Section 408 of the Companies Act 2006, the Company has not
presented its own Income Statement. The amount of the Company's return for the
financial year, dealt with in the financial statements of the Group, is a gain
after tax of £119,117,000 (2020: loss of £9,279,000).
Segmental Reporting
The Directors are of the opinion that the Group is engaged in a single segment
of business, being investment business. The Group primarily invests in
companies listed in the UK.
Accounting Developments
In the year under review, the Company has applied amendments to IFRS issued by
the IASB. These include annual improvements to IFRS, changes in standards,
legislative and regulatory amendments, changes in disclosure and presentation
requirements. The adoption of the changes to accounting standards has had no
material impact on these or prior years' financial statements. There are
amendments to IAS/IFRS that will apply from 1 May 2021 as follows:
* Interest Rate Benchmark Reform - lBOR 'phase 2' (Amendments to IFRS 9, IAS
39 and IFRS 7);
* IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies.
Changes in Accounting Estimates and Errors (Amendment - Disclosure
Initiative - Definition of Material); and
* Revisions to the Conceptual Framework for Financial Reporting.
The adoption of the changes to accounting standards has had no material impact
on these or prior years' financial statements.
Standards issued but not yet effective
There are no standards or amendments not yet effective which are relevant or
have a material impact on the Company.
Critical Accounting Judgements and Key Sources of Estimation Uncertainty
The preparation of financial statements in conformity with accounting standards
requires management to make judgements, estimates and assumptions that affect
the application of policies and reported amounts in the financial statements.
The estimates and associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making judgements about
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.
The areas requiring the most significant judgement and estimation in the
preparation of the financial statements are: recognising and classifying
unusual or special dividends received as either revenue or capital in nature;
the valuation of warrants; and recognition of expenses between capital and
income.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period
of the revision and future period if the revision affects both current and
future periods. There were no accounting estimates or judgements that had a
significant impact on the financial statements in the current period.
Investments
The Group's business is investing in financial assets with a view to profiting
from their total return in the form of income and capital growth. This
portfolio of financial assets is managed and its performance evaluated on a
fair value basis, in accordance with a documented investment strategy, and
information about the portfolio is provided internally on that basis to the
Group's Board of Directors.
Upon initial recognition, the investments held by the Company, except for the
investment in the subsidiary, are classified 'at fair value through profit or
loss'. They are included initially at fair value, which is taken to be their
cost (excluding expenses incidental to the acquisition, which are written off
in the Income Statement and allocated to 'capital' at the time of acquisition).
When a purchase or sale is made under a contract, the terms of which require
delivery within the timeframe of the relevant market, the investments concerned
are recognised or derecognised on the trade date. Subsequent to initial
recognition, investments are valued at fair value through profit or loss. For
listed investments this is deemed to be bid market prices or closing prices for
Stock Exchange Electronic Trading Service - quotes and crosses ("SETSqx").
Changes in fair value of investments are recognised in the Income Statement as
a capital item. On disposal, realised gains and losses are also recognised in
the Income Statement as capital items.
The investment in the subsidiary company, DIT Income Services Limited, is held
at cost £1 (2020: £1). Investments held as current assets by the subsidiary
undertaking are classified as 'held for trading' and are at fair value. Dealing
profits or losses on these investments are taken to revenue in the Income
Statement. There were no investments held by the subsidiary at the year end
(2020: none).
Warrants give the Company the right, but not the obligation, to buy common
ordinary shares in an investee company at a fixed price for a pre-defined time
period. The fair value is determined by the Manager through use of models using
available observable inputs of the warrant: the exercise share price of the
investee company, the expiration period plus other factors including the
prevailing interest rate and associated risks.
All investments for which fair value is measured or disclosed in the financial
statements are categorised within the fair value hierarchy in note 12.
Foreign Currency
Transactions denominated in foreign currencies are converted to sterling at the
actual exchange rate as at the date of the transaction. Monetary assets and
liabilities and non-monetary assets held at fair value denominated in foreign
currencies at the year end are reported at the rate of exchange at the Balance
Sheet date. Any gain or loss arising from a change in exchange rate subsequent
to the date of the transaction is included as an exchange gain or loss in the
capital reserve or the revenue account depending on whether the gain or loss is
of a capital or revenue nature.
Derivatives
Derivatives, including Index Put options, which are listed investments, are
classified as financial instruments at fair value through profit or loss.
Derivatives are initially recorded at cost (being premium paid to purchase the
option) and subsequently valued at fair value and included in current assets/
liabilities. Derivatives are derecognised when the contract expires or on the
trade date when the contract is sold.
Changes in the fair value of derivative instruments are recognised as they
arise in the capital column of the Income Statement. The fair value is
calculated by either the quoted price (if listed) or a broker using models with
inputs from market prices. On disposal or expiration, realised gains and losses
are also recognised in the Income Statement as capital items.
Cash and Cash Equivalents
For the purposes of the Balance Sheet, cash comprises cash in hand and demand
deposits. Cash equivalents are short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject to
insignificant risk of changes in value.
For the purposes of the Cash Flow Statement, cash and cash equivalents consist
of cash and cash equivalents as defined above, net of outstanding bank
overdrafts when applicable.
Trade Receivables, Prepayments and Other Debtors
Trade receivables, prepayments and other debtors are recognised at amortised
cost or estimated fair value.
Trade Payables and Short-term Borrowings
Trade payables and short-term borrowings are measured at amortised cost.
Income
Dividends receivable on quoted equity shares are taken to revenue on an
ex-dividend basis. Dividends receivable on equity shares where no ex-dividend
date is quoted are brought into account when the Company's right to receive
payment is established. Fixed returns on non-equity shares are recognised on a
time-apportioned basis. Dividends from overseas companies are shown gross of
any non recoverable withholding taxes.
Special dividends are taken to the revenue or capital account depending on
their nature. In deciding whether a dividend should be regarded as a capital or
revenue receipt, the Board reviews all relevant information as to the reasons
for the sources of the dividend on a case-by-case basis.
When the Company has elected to receive scrip dividends in the form of
additional shares rather than in cash, the amount of the cash dividend forgone
is recognised as income. Any excess in the value of the cash dividend is
recognised in the capital column.
All other income is accounted for on a time apportioned accruals basis and is
recognised in the Income Statement.
Expenses and Finance Costs
All expenses are accounted for on an accruals basis. On the basis of the
Board's expected long-term split of total returns in the form of capital and
revenue returns of 75% and 25% respectively, the Company charges 75% of its
management fee and finance costs to capital. All other administrative expenses
are charged through the revenue column in the Income Statement.
Expenses incurred directly in relation to arranging debt and loan facilities
have been capitalised and amortised over the term of the finance.
Expenses incurred directly in relation to placings and offers for subscription
of shares are deducted from equity and charged to the share premium account.
Taxation
Deferred tax is provided using the liability method on temporary differences
between the tax bases of assets and liabilities and their carrying amount for
financial reporting purposes at the reporting date. Deferred tax assets are
only recognised if it is considered more likely than not that there will be
suitable profits from which the future reversal of timing differences can be
deducted. In line with the recommendations of the AIC SORP, the allocation
method used to calculate the tax relief on expenses charged to capital is the
"marginal" basis. Under this basis, if taxable income is capable of being
offset entirely by expenses charged through the revenue account, then no tax
relief is transferred to the capital account.
The charge for taxation is based on the net revenue for the year and takes into
account taxation deferred or accelerated because of temporary differences
between the treatment of certain items for accounting and taxation purposes.
The actual charge for taxation in the income statement relates to irrecoverable
withholding tax on overseas dividends received during the year.
Dividends Payable to Shareholders
Dividends to shareholders are recognised as a liability in the period in which
they are paid or approved in general meetings and are taken to the Statement of
Changes in Equity. Dividends declared and approved by the Company after the
Balance Sheet date have not been recognised as a liability of the Company at
the Balance Sheet date.
Share Capital
The Company classifies financial instruments issued as financial liabilities or
equity instruments in accordance with the substance of the contractual terms of
the instruments. The share capital of the Company comprises redeemable ordinary
shares ("ordinary shares"), C shares, when in issue, and management shares.
The Company is a closed-ended investment company with an unlimited life. The
ordinary shares are not puttable instruments because redemption is conditional
upon certain market conditions and/or Board approval. As such, they are not
required to be classified as debt under IAS 32 'Financial Instruments:
Disclosure and Presentation'.
As defined in the Articles of Association, redemption of ordinary shares is at
the sole discretion of the Directors, therefore the ordinary shares have been
classified as equity.
The issuance, acquisition and resale of ordinary shares are accounted for as
equity transactions and no gain or loss is recognised in the Income Statement.
Share Premium
The share premium account represents the accumulated premium paid for shares
issued in previous periods above their normal value less issue expenses. This
is a reserve forming part of the non-distributable reserves. The following
items are taken to this reserve:
* costs associated with the issue of equity; and
* premium on the issue of shares.
Capital Redemption Reserve
The capital redemption reserve represents non distributable reserves that arise
from the purchase and cancellation of shares.
Special Reserve
The special reserve was created by a cancellation of the share premium account.
Its main purpose is to allow the Company to meet annual redemption requests for
ordinary shares. The costs of share buybacks and meeting annual redemption
requests, including related stamp duty and transaction costs, are also charged
to the special reserve. The special reserve is distributable.
Capital Reserve
The following are taken to this reserve:
* gains and losses on the disposal of investments;
* exchange difference of a capital nature;
* expenses, together with the related taxation effect, allocated to this
reserve in accordance with the above policies; and
* increase and decrease in the valuation of investments held at the year end.
The capital reserve is distributable.
Revenue Reserve
The revenue reserve represents the surplus accumulated revenue profits and is
distributable.
2 Income
Year ended Year ended
31 May 2021 31 May 2020
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
Income from
investments:
UK dividends 10,628 1,245 11,873 10,346 - 10,346
UK REIT dividend income 169 - 169 230 - 230
Non UK dividend income 4,288 - 4,288 2,890 - 2,890
UK fixed interest 386 - 386 516 - 516
15,471 1,245 16,716 13,982 - 13,982
Other income:
Bank deposit interest - - - 17 - 17
Exchange gains 19 - 19 17 - 17
Net dealing profit of (88) - (88) 85 - 85
subsidiary*
Underwriting income 19 - 19 - - -
Other income 51 - 51 - - -
Total income 15,472 1,245 16,717 14,101 - 14,101
* Represents realised trading gains and losses from trading transactions. There
are no other expenses/income in respect of the subsidiary.
3 Management Fee
Year ended Year ended
31 May 2021 31 May 2020
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
Management fee 764 2,293 3,057 744 2,234 2,978
The basic management fee payable to the Manager is calculated at the rate of
one-twelfth of 0.9% of the average market capitalisation of the Company up to £
300m, 0.8% per annum on the average market capitalisation between £300m and £
500m and 0.7% per annum on the average market capitalisation above £500m on the
last business day of each calendar month. The basic management fee accrues
daily and is payable in arrears in respect of each calendar month. For the
purpose of calculating the basic fee, the 'adjusted market capitalisation' of
the Company is defined as the average daily mid-market price for an ordinary
share and C share (when in issue), multiplied by the number of relevant shares
in issue, excluding those held by the Company in treasury, on the last business
day of the relevant month. In addition, the AIFM is entitled to receive a
management fee on any Redemption Pool, as detailed in the Strategic Report
above.
At 31 May 2021 an amount of £316,000 was outstanding and due to Premier
Portfolio Managers Limited (2020: £232,000) in respect of management fees,
which is included in "Other creditors" in note 17.
4 Other Expenses
Year ended Year ended
31 May 2021 31 May 2020
£000 £000
Fund Administration and Secretarial 127 125
services
Audit of the Group's financial - BDO LLP 38 -
statements (payable
by the Company only) - Ernst & Young - 40
LLP
Directors' fees (see the Directors' 163 180
Remuneration Report in the full Annual
Report)
Other expenses 433 496
761 841
The audit of the Group's financial statements includes the cost of the audit of
DIT Income Services Limited of £3,000 (2020: £3,000), which is paid by the
parent Company.
5 Finance Costs
Year ended 31 May 2021 Year ended 31 May 2020
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
£20m (2020: £20m) revolving loan 5 15 20 5 15 20
facility arrangement fee
£20m (2020: £20m) revolving loan 23 70 93 23 67 90
facility non-utilisation fee
28 85 113 28 82 110
The Group entered into a revolving loan facility (the "facility") on 4 October
2019 with The Royal Bank of Scotland International Limited, London branch
("RBS") for £20m. The facility was extended during the year, to 4 October 2021
by agreement, with no change in the existing terms. The facility bears interest
at the rate of 1.35% over LIBOR on any drawn down balance and a non-utilisation
fee of 0.5% on any undrawn balance. The covenants require that borrowings will
not at any time exceed 25% of the adjusted portfolio value, being the total
portfolio value less the gross market value of each investment which is not a
quoted equity freely traded on a recognised investment exchange, and that the
net asset value shall at all times be greater than £210m. If the Group breaches
any covenant it is required to notify RBS of any default and the steps being
taken to remedy it.
The Group has not drawn down this facility during the year (2020: nil) and no
amounts have been drawn down at the date of signing this report.
6 Taxation
Year ended Year ended
31 May 2021 31 May 2020
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
Prior years - - - 59 - 59
recoverable WHT now
written off
Overseas withholding 539 - 539 67 - 67
tax suffered
Total overseas 539 - 539 126 - 126
withholding tax
suffered
Year ended Year ended
31 May 2021 31 May 2020
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
Return on activities 13,919 105,648 119,567 12,488 (21,556) (9,068)
before taxation
Theoretical tax at UK 2,645 20,073 22,718 2,373 (4,096) (1,723)
corporation tax rate
of 19% (2020: 19%)
Effects of:
UK dividends that are (2,019) - (2,019) (1,966) - (1,966)
not taxable
Overseas dividends (749) - (749) (530) - (530)
that are not taxable
Unrelieved losses 17 - 17 - - -
Non-deductible - (20,525) (20,525) - 3,656 3,656
investment losses
Overseas taxation 539 - 539 67 - 67
suffered
Overseas tax - prior - - - 59 - 59
year's recoverable tax
written off
Double tax relief 11 - 11 2 - 2
expensed in current
period
Unrelieved expenses 95 452 547 121 440 561
Actual current tax 539 - 539 126 - 126
charge
Factors that may affect future tax charges
At 31 May 2021, the Company had no unprovided deferred tax liabilities (2020: £
nil). At that date, based on current estimates and including the accumulation
of net allowable losses, the Company had unrelieved losses of £26,224,000
(2020: £23,135,000) that are available to offset future taxable revenue. A
deferred tax asset at a rate of 19% (2020: 19%) of £4,983,000 (2020: £
4,396,000) has not been recognised because the Company is not expected to
generate sufficient taxable income in future periods in excess of the available
deductible expenses and accordingly, the Company is unlikely to be able to
reduce future tax liabilities through the use of existing surplus losses.
The loss from the subsidiary was £88,459 (2020: Profit £85,152) which is being
carried forward to be relieved against future profits.
In addition, deferred tax is not provided on capital gains and losses arising
on the revaluation or disposal of investments because the Company meets (and
intends to continue for the foreseeable future to meet) the conditions for
approval as an investment trust company under HMRC rules.
7 Return per Share
Ordinary Shares
The return per ordinary share is based on the net gain after taxation of £
119,028,000 (2020: loss £9,194,000) and on 358,929,991 (2020: 378,484,338)
ordinary shares, being the weighted average number of ordinary shares in issue
during the year.
The return per ordinary share detailed above can be further analysed between
revenue and capital as follows:
Year ended 31 May 2021 Year ended 31 May 2020
Revenue Capital Total Revenue Capital Total
Basic & diluted
Net profit/(loss) 13,380 105,648 119,028 12,362 (21,556) (9,194)
(£'000)
Weighted average 358,929,991 378,484,338
number of ordinary
shares in issue
Return per 3.73 29.43 33.16 3.27 (5.70) (2.43)
ordinary share
(pence)
The 50,000 Management shares do not participate in the returns of the Company.
8 Dividends per Ordinary Share
Amounts recognised as distributions to equity holders in the year:
Year ended 31 May 2021 Year ended 31 May
2020
pence pence
£000 per share £000 per share
In respect of the previous
year:
Third interim dividend 3,222 0.90 3.405 0.90
Final dividend 3,760 1.05 4,161 1.10
Special dividend - - 605 0.16
In respect of the year under
review:
First interim dividend 3,043 0.85 3,215 0.85
Second interim dividend 3,222 0.90 3,405 0.90
Dividends distributed during 13,247 3.70 14,791 3.91
the year
The Directors have declared a third interim dividend in respect of the year
ended 31 May 2021 of 0.90p per ordinary share payable on 31 August 2021 to all
shareholders on the register at close of business on 25 June 2021. A final
dividend of 1.10p per ordinary share has also been recommended by the Board.
Subject to shareholder approval at the forthcoming AGM, this dividend will be
payable on 30 November 2021 to shareholders on the register at close of
business on 24 September 2021. The ex-dividend date will be 23 September 2021.
The total dividends payable in respect of the financial year for the purposes
of the income retention test for Section 1158 of the Corporation Tax Act 2010
are set out below.
Year ended Year ended
31 May 31 May
2021 2020
Revenue available for distribution by way of dividends for 13,469 12,277
the year
First interim dividend 0.85p (2020: 0.85p) per ordinary (3,043) (3,215)
share
Second interim dividend 0.90p (2020: 0.90p) per ordinary (3,222) (3,405)
share
Declared third interim dividend 0.90p (2020: 0.90p) per (3,253) (3,222)
ordinary share
Proposed final dividend of 1.10p (2020: 1.05p) per ordinary (3,976) (3,759)
share
Estimated revenue reserve utilised for the year (25) (1,324)
9 Called-Up Share Capital
31 May 2021 31 May 2020
Number £000 number £000
Ordinary shares of 0.1p
each
Opening balance 378,289,047 378 383,787,239 384
Issue of ordinary shares 3,400,000 3 - -
Cancellation of ordinary (20,243,942) (20) (5,498,192) (6)
shares
361,445,105 361 378,289,047 378
The rights and restrictions attached to shares, together with the capital
structure of the Company, are set out above.
Redemption of Ordinary Shares
The Company, which is a closed-ended investment company with an unlimited life,
has a redemption facility through which shareholders are entitled to request
the redemption of all or part of their holding of ordinary shares on an annual
basis on 31 May. As set out in the Articles of Association, the Board may, at
its absolute discretion, elect not to operate the annual redemption facility in
whole or in part. Accordingly, the ordinary shares have been classified as
equity.
The Company received redemption requests for 347,580 ordinary shares in respect
of the 28 May 2021 Redemption Point. All of these shares were matched with
buyers and sold at a calculated Redemption Price of 118.08 pence per share.
Following this and at the date of this Report, the issued capital and voting
rights remained unchanged at 361,445,105 ordinary shares.
Details of the redemption facility are set out in the full Annual Report.
Management Shares
The 50,000 management shares with a nominal value of £1 each were allotted to
Miton Group plc on 30 March 2011, the parent company of the Manager. The
management shares are non-voting and non-redeemable and, upon a winding-up or
on a return of capital of the Company, shall only receive the fixed amount of
capital paid up on such shares and shall confer no right to any surplus capital
or assets of the Company.
As at 31 May 2021, £12,500 had been paid up (2020: £12,500). The balance is
payable on demand.
10 Reserves
Share Capital Capital Capital
premium redemption Special* reserve reserve Revenue*
account reserve reserve realised unrealised reserve
2021 £000 £000 £000 £000 £000 £000
Opening balance 192,562 6 40,530 84,663 2,780 15,041
Issue of ordinary shares 4,000 - - - - -
Cancellation of ordinary - 20 (18,152) - - -
shares
Profit on realisation of - - - 20,045 -
investments -
Exchange losses on - - - (12) -
settlements and currency
accounts -
Capital dividends - - - 1,245 - -
Unrealised net increase - - - - 86,748 -
in value of investments
Management fees/finance - - - (2,378) -
costs charged to capital -
Equity dividends paid - - - - - (13,247)
Revenue return on - - - - - 13,380
ordinary activities
after tax
Closing balance 196,562 26 22,378 103,563 89,528 15,174
* At 31 May 2021, the distributable reserves of the Company are £141,115,000
(2020: £139,249,000).
Share Capital Special Capital Capital Revenue
premium redemption reserve reserve reserve reserve
account reserve £000 realised unrealised £000
2020 £000 £000 £000 £000
Opening balance 192,562 - 45,775 84,034 24,965 17,470
Cancellation of ordinary - 6 (5,245) - - -
shares
Net loss on realisation - - - (10,256) -
of investments -
Exchange losses on - - - (33) -
settlements and currency
accounts -
Unrealised net decrease - - - - (22,625)
in value of investments -
Movement in value of - - - 13,234 440
derivative instruments -
Management fees/finance - - - (2,316) -
costs charged to capital -
Equity dividends paid - - - - - (14,791)
Revenue return on - - - - - 12,362
ordinary activities
after tax
Closing balance 192,562 6 40,530 84,663 2,780 15,041
11 Net Asset Value per Ordinary Share
The net asset value per ordinary share and the net asset values attributable at
the year end were as follows:
Net asset value Net assets Net asset value Net assets
per share attributable per share attributable
31 May 2021 31 May 2021 31 May 2020 31 May 2020
pence £000 pence £000
Opening balance 118.31 427,642 88.82 336,010
- Basic and
diluted
Net asset value per ordinary share is based on net assets at the year end and
361,445,105 ordinary shares (2020: 378,289,047), being the number of ordinary
shares in issue at the year end.
The net asset value of £1 (2020: £1) per management share is based on net
assets at the year end of £50,000 (2020: £50,000) and 50,000 (2020: 50,000)
management shares. The shareholders have no right to any surplus capital or
assets of the Company.
12 Investments
Group and Company 31 May 2021 31 May 2020
£000 £000
Investment portfolio summary:
Opening book cost 307,618 300,843
Opening investment holding gains 2,780 25,405
Total investments classified at fair 310,398 326,248
value
Analysis of investment portfolio movements
Opening fair value 310,398 326,248
Movements in the period:
Purchases at cost 112,104 140,596
Sales - proceeds (114,472) (123,565)
- gains/(losses) on sales 20,045 (10,256)
Movement in investment holding gains 86,748 (22,625)
Closing fair value 414,823 310,398
Closing book cost 325,295 307,618
Closing investment holding gains 89,528 2,780
Total closing investments designated at 414,823 310,398
fair value
The Company received £114,472,000 (2020: £123,565,000) from investments sold in
the year. The book cost of these investments was £94,427,000 (2020: £
113,309,000). These investments have been revalued over time and until they
were sold any unrealised gain or losses were included in the fair value of
investments.
Year ended Year ended
31 May 2021 31 May 2020
£000 £000
Transaction costs:
Costs on acquisitions 393 554
Costs on disposals 68 82
461 636
Year ended Year ended
31 May 2021 31 May 2020
£000 £000
Analysis of capital gains/(losses)
Realised gains/(losses) on sales 20,045 (10,256)
Movement in unrealised gains 86,748 (22,625)
106,793 (32,881)
Fair Value Hierarchy
Financial assets of the Group are carried in the Balance Sheet at their fair
value or approximation of fair value. The fair value is the amount at which the
asset could be sold in an ordinary transaction between market participants, at
the measurement date, other than a forced or liquidation sale. The Group
measures fair values using the following hierarchy that reflects the
significance of the inputs used in making the measurements.
Categorisation within the hierarchy has been determined on the basis of the
lowest level input that is significant to the fair value measurement of the
relevant asset as follows:
Level 1 - Valued using quoted prices, unadjusted in active markets for
identical assets and liabilities.
Level 2 - Valued by reference to valuation techniques using observable inputs
for the asset or liability other than quoted prices included in level 1.
Level 3 - Valued by reference to valuation techniques using inputs that are
not based on observable market data for the asset or liability.
Assessing the significance of a particular input requires judgement,
considering factors specific to the asset or liability.
The table below sets out the fair value measurement of financial assets and
liabilities in accordance with the fair value hierarchy.
Level 1 Level 2 Level 3 Total
£000 £000 £000 £000
Financial assets at fair value through
profit or loss at 31 May 2021
Equity investments 412,568 - - 412,568
Fixed interest bearing securities - 2,255 - 2,255
412,568 2,255 - 414,823
Level 1 Level 2 Level 3 Total
£000 £000 £000 £000
Financial assets at fair value through
profit or loss at 31 May 2020
Equity Investments 304,590 1,420 - 306,010
Fixed interest bearing securities - 4,388 - 4,388
304,590 5,808 - 310,398
The Level 2 investments are at fair value calculated using observable inputs.
The fair value is calculated using:
* the observable fair value on an inactive market;
* an intrinsic value above cost, allowing for the conversion value of the
underlying, actively traded bid price where applicable; and
* where the unlisted convertible debt conversion value was not greater than
par value (being 'out of the money') then held at par value being an
approximation of fair value.
The fair value of Level 3 investments is based on discounted anticipated future
cash returns.
Year ended Year ended
31 May 2021 31 May 2020
Level 3 Level 3
£000 £000
Opening fair value investments - -
Transfer from Level 1 to Level 3 40 -
Movement in unrealised investment holding gains (40) -
Closing fair value of investments - -
Trading Income
The Company's subsidiary completes trading transactions. The value of assets
held by the subsidiary as at 31 May 2021 was £nil (2020: £nil). The difference
between the sale and purchase of assets is trading income recognised in the
Income Statement
13. Derivative Contracts
Listed Put options at fair value through profit Year ended Year ended
or loss at 31 May 2020 31 May 2021 31 May 2020
£000 £000
Opening book cost - 6,753
Opening investment holding loss - (440)
Opening fair value - 6,313
Movements in the period:
Sales - proceeds - (19,987)
- gains on sales - 13,234
Movement in unrealised loss - 440
Closing fair value - -
Derivative contracts serve as components of the Company's investment strategy
and are utilised primarily to structure and hedge investments to enhance
performance and reduce risk of the Company (the Company does not designate any
derivative as hedging instrument for hedge accounting purposes). The derivative
contracts that the Company may hold from time to time or issue include:
index-linked notes, contracts for differences, covered options and other equity
related instruments.
The Company's investment objective sets limits on investments in derivatives.
The Manager closely monitors the Company's exposure under derivative contracts
and any use of derivatives for investment purposes will be made on the basis of
the same principles of risk spreading and diversification that apply to the
Company's direct investments. The Company will not enter into uncovered short
positions.
During the year the Company held no derivative contracts or completed
transactions.
14 Substantial Share Interests
The Company has notified interests in 3% or more of the voting rights of 16
(2020: 18) investee companies (none of which are closed-end investment funds).
The Board does not consider any of the Company's other equity investments to be
individually material in the context of the financial statements.
15 Investment in Subsidiary
The Company owns the whole of the issued ordinary share capital (£1) of DIT
Income Services Limited, an investment dealing company registered in England
and Wales. The registered office of the subsidiary is Beaufort House, 51 New
North Road, Exeter, Devon EX4 4EP. The subsidiary is held at cost of £1 and has
provided loans to the Company amounting to £849,000 at 31 May 2021 (2020: £
985,000), which are payable on demand.
16 Trade and Other Receivables
Group Company
31 May 2021 31 May 2020 31 May 2021 31 May 2020
£000 £000 £000 £000
Amounts due from brokers - 399 - 399
Dividends receivable 1,334 1,643 1,334 1,643
Accrued income 39 77 39 77
Taxation recoverable 418 508 418 508
Prepayments and other 86 90 86 90
debtors
1,877 2,717 1,877 2,717
17 Trade and Other Payables
Group Company
31 May 2021 31 May 2020 31 May 2021 31 May 2020
£000 £000 £000 £000
Amounts due to brokers - 2,551 - 2,551
Amounts due to - - 849 985
subsidiary
Other creditors 437 370 437 370
437 2,921 1,286 3,906
18 Capital Commitments and Contingent Liabilities
At 31 May 2021, there were no outstanding commitments (2020: £1,420,000) and no
contingent liabilities (2020: £nil).
19 Analysis of Financial Assets and Liabilities
Investment Objective And Policy
The Group's investment objective and policy are detailed above.
The Group's investing activities in pursuit of its investment objective involve
certain inherent risks.
The Group's financial instruments comprise:
* shares and debt securities held in accordance with the Group's investment
objective and policies;
* derivative instruments for efficient portfolio management, gearing and
investment purposes;
* cash, liquid resources and short-term debtors and creditors that arise from
its operations; and
* current asset investments held by its subsidiary.
The risks identified arising from the Group's financial instruments are market
risk (which comprises market price risk, interest rate risk and foreign
currency risk), liquidity risk and credit and counterparty risk. The Group may
enter into derivative contracts to manage risk. The Board reviews and agrees
policies for managing each of these risks, which are summarised below. These
policies have remained unchanged since the beginning of the accounting year.
Market Risk
Market risk arises mainly from uncertainty about future prices of financial
instruments used in the Group's business. It represents the potential loss the
Group might suffer through holding market positions by way of price movements,
interest rate movements and exchange rate movements. The Investment Manager
assesses the exposure to market risk when making each investment decision and
these risks are monitored by the Investment Manager on a regular basis and the
Board at quarterly meetings with the Investment Manager.
Market price risk
Market price risk (i.e. changes in market prices other than those arising from
currency risk or interest rate risk) may affect the value of investments.
The Board manages the risks inherent in the investment portfolio by ensuring
full and timely reporting of relevant information from the Manager. Investment
performance and exposure are reviewed at each Board meeting.
The Group's exposure to other changes in market prices as at 31 May 2021 on its
investments held at fair value through profit or loss was £414,823,000 (2020: £
310,398,000). The Group has experienced volatility in the fair value of
investments during recent years due to COVID-19 and Brexit.
The Group has used 20% to demonstrate the impact of a significant reduction/
increase in the fair value of the investments and the impact upon the Company
that might arise from future significant events. A fall of 20% in fair value
would reduce net assets by £82,965,000 at 31 May 2021. An equal change in the
opposite direction would have increased the net assets and net profit available
to shareholders by an equal and opposite amount. The analysis is based on
closing balances only and is not representative of the year as a whole.
Interest rate risk
Interest rate movements may affect the level of income receivable on cash
deposits and payable on its revolving credit facility. The Group's financial
assets and liabilities, excluding short-term debtors and creditors, may include
investment in fixed interest securities, such as UK corporate debt stock, whose
fair value may be affected by movements in interest rates. The majority of the
Group's financial assets and liabilities, however, are non-interest bearing. As
a result, the Group's financial assets and liabilities are not subject to
significant amounts of risk due to fluctuations in the prevailing levels of
market interest rates. There was limited exposure to interest bearing
liabilities during the year ended 31 May 2021 (2020: same).
The Company has a £20m revolving loan facility with RBS an interest rate of
1.35% above LIBOR on any drawn down balance and 0.65% on any undrawn balance
where less than 25% of the facility is drawn down or 0.55% on any undrawn
balance where more than 25% of the facility is drawn down. During the year the
facility has not been drawn down. The revolving loan facility Is only subject
to changes in interest rates, and therefore interest rate risk, when it is
drawn down.
The possible effects on the fair value and cash flows that could arise as a
result of changes in interest rates are taken into account when making
investment decisions. The Board imposes borrowing limits to ensure gearing
levels are appropriate to market conditions.
As detailed above, at 31 May 2021 the Company held one (2020: three) fixed
interest security representing 0.5% of the total investment portfolio (2020:
1.3%).
The interest rate profile of the Group (excluding short-term debtors and
creditors) was as follows:
As at 31 May 2021 Weighted Floating Fixed
average rate rate
interest £000 £000
rate
%
Assets and liabilities
Fixed interest securities 8.00 - 2,255
Cash at bank - 11,379 -
11,379 2,255
As at 31 May 2020 Weighted
average
interest Floating
rate rate Fixed rate
% £000 £000
Assets and liabilities
Fixed interest securities 8.00 - 4,388
Cash at bank - 25,816 -
25,816 4,388
The weighted average interest rate is based on the current yield of each asset,
weighted by its market value.
The weighted average fixed interest rate is based on the current yield of each
asset, weighted by its current market value. The maturity dates and nominal
interest rates on these investments held at fair value through profit or loss
are shown in the portfolio information above. The weighted average years to
maturity are 0.71 years (2020: 1.69 years).
The floating rate assets consist of cash deposits on call earning interest at
the prevailing market rates.
The interest rate risk sensitivity of the Group on its floating rate assets and
liabilities is given below:
If interest rates had been 50 basis points higher or lower and all other
variables were held constant, the Group's net assets and profit for the year
ended 31 May 2021 would increase/decrease by £57,000 (2020: increase/decrease
by £129,000). This is attributable to the Group's exposure to interest rates on
its floating rate cash balances and bank overdraft as at the year ended 31 May
2021. If there was a fall in interest rates it would potentially impact the
Company as above, by turning positive interest to negative interest.
Foreign currency risk
Although the Company's performance is measured in sterling, a proportion of the
Group's assets may be either denominated in other currencies or are in
investments with currency exposure. Any income denominated in a foreign
currency is converted into sterling upon receipt. At the Balance Sheet date,
all the Group's assets were denominated in sterling and accordingly the only
currency exposure the Group has is through the trading activities of its
investee companies.
Liquidity Risk
Liquidity risk is not considered to be significant as the Group is a
closed-ended investment trust and the Group's assets primarily comprise cash
and readily realisable securities. They may, however, be difficult to realise
in adverse market conditions. The Group can achieve short-term flexibility by
the use of its overdraft facility.
The maturity profile of the Group's financial liabilities of £437,000 (2020: £
2,921,000) are all due in one year or less.
Credit Risk
This is the risk that a failure of a counterparty to a transaction to discharge
its obligations under that transaction could result in the Group suffering a
loss.
The maximum exposure to credit risk as at 31 May 2021 was £13,256,000 (2020: £
28,533,000). The calculation is based on the Group's credit risk exposure as at
31 May 2021.
The Group's listed investments are held on its behalf by Bank of New York
Mellon acting as the Group's custodian. The Depositary will ensure that all
accounts are segregated. Bankruptcy or insolvency of the custodian may cause
the Group's rights with respect to securities held by the custodian to be
delayed. The Board monitors the Group's risk by reviewing the custodian's
internal controls report.
Where the Manager makes an investment in a bond or other security with credit
risk, that credit risk is assessed to minimise the risk to the Group of
default.
The Company's cash balances are held on its behalf by BNYM. The Board monitor
the credit worthiness of BNYM, currently rated at Aa1 (Moody's). The exposure
of cash held at BNYM as at 31 May 2021 was £11,379,000 (2020: £25,816,000). The
cash balances will fluctuate throughout the year and the Board will monitor the
exposure.
Investment transactions are carried out with a number of brokers whose
creditworthiness is reviewed by the Manager. Transactions are ordinarily
undertaken on a delivery versus payment basis whereby the Group's custodian
bank ensures that the counterparty to any transaction entered into by the Group
has delivered on its obligations before any transfer of cash or securities away
from the Group is completed.
Cash is only held at banks that have been identified by the Board as reputable
and of high credit quality.
None of the Group's assets are past due and the adoption of the expected credit
loss model for impairment under IFRS 9 has not had a material impact on the
Company.
Derivatives
The Manager may use derivative instruments in order to 'hedge' the market risk
of part of the portfolio. The Manager reviews the risks associated with
individual investments and, where they believe it appropriate, may use
derivatives to mitigate the risk of adverse market (or currency) movements. The
Manager discusses regularly the hedging strategy with the Board.
Capital Management Policies
The Company's capital management objectives are:
* to ensure that it will be able to continue as a going concern; and
* to maximise the income and capital return over the long-term to its equity
shareholders through an appropriate balance of equity capital and 'debt'.
As stated in the investment policy, the Company has authority to borrow up to
15% of net asset value through a mixture of bank facilities and certain
derivative instruments. There were no borrowings as at 31 May 2021 (2020: £
nil). Also, as a public company the minimum share capital is £50,000.
2021 2020
£000 £000
The Company's capital at 31 May
comprised:
Debt:
Bank loan facility - -
Equity:
Equity share capital 437 434
Retained earnings and other reserves 427,205 335,575
Total shareholders' funds 336,010
427,642
Debt as a % of net assets 0.00% 0.00%
The Board, with the assistance of the Manager, monitors and reviews the broad
structure of the Company's capital on an ongoing basis. This review includes:
* the planned level of gearing, which takes into account the Manager's view
of the market;
* the need to buy back shares for cancellation or treasury, which takes
account of the difference between the net asset value per share and the
share price (i.e. the level of share price discount or premium);
* the need for new issues of equity shares; and
* the extent to which revenue in excess of that which is required to be
distributed should be retained.
The Company's objectives, policies and processes for managing capital have
remained unchanged since its launch.
20 Transactions with the Manager and Related Parties
The amounts paid to the Manager pursuant to the Management Agreement are
disclosed in note 3. Management fees for the year amounted to £3,057,000 (2020:
£2,978,000).
As at the year end, the following amounts were outstanding in respect of
management fees: £316,000 (2020: £232,000).
Fees paid to the Company's Directors are disclosed in the Directors'
Remuneration Report. At the year end, there were no outstanding fees payable to
Directors (2020: £nil).
There were no other identifiable related parties at the year end.
GLOSSARY
AIC
The Association of Investment Companies.
AIM
The Alternative Investment Market is a sub-market of the London Stock Exchange.
It allows smaller companies to float shares with a more flexible regulatory
system than applicable to the main market.
Alternative Performance Measure ("APM")
An APM is a numerical measure of the Company's current, historical or future
financial performance, financial position or cash flows, other than a financial
measure defined or specified in the applicable financial framework.
The Company uses a number of APMs to provide information in order to assist the
Board and Manager in monitoring the Company in order for them to meet the
objectives of the Company including the management of risk. These consist of,
but are not limited to, key performance and financial performance indicators
set out in the various relevant parts of the Report.
Annual General Meeting ("AGM")
All public companies have an AGM every year, and this is the opportunity for
the shareholders to confirm their approval of the Annual Report and financial
statements, the annual dividend and the appointment of the Directors and
Auditor. It is also a good time for shareholders to meet the non-executive
Directors. The Company's AGM will be held on Wednesday, 20 October 2021 at
11.30 am at the offices of Stephenson Harwood LLP, 1 Finsbury Circus, London
EC2M 7SH. In the event that any changes to the AGM arrangements will be
required due to the COVID-19 pandemic, the Company will notify shareholders via
a Regulatory News Service announcement. One of the fund managers will give
shareholders a presentation on the current position of the Company's portfolio
and some thoughts on the market outlook.
Discount/Premium
If the share price of an investment trust is lower than the NAV per share, the
shares are said to be trading at a discount. The size of the discount is
calculated by subtracting the share price from the NAV per share and is usually
expressed as a percentage of the NAV per share. If the share price is higher
than the NAV per share, this situation is called a premium.
31 May 31 May
Premium/(Discount) Calculation Page 2021 2020
Closing NAV per share (p) 4 118.31 88.82 (a)
Closing share price (p) 4 119.00 84.00 (b)
Premium/(discount) (c = ((b - a)/a) x 4 0.58 (5.43) (c)
100) (%)
The discount/premium and performance is calculated in accordance with
guidelines issued by the AIC. The discount/premium is calculated using the NAV
per share inclusive of accrued income with debt at market value.
Dividend Yield
The annual dividend expressed as a percentage of the mid market share price.
This financial ratio shows how much an investment pays out in dividends
relative to its stock price. The dividends are based upon historic dividend
rates and announcements by the investment company. The dividend yield indicates
the anticipated future cashflows from the investment contributing to the income
of the Group.
Financial Conduct Authority ("FCA")
This regulator oversees the fund management industry, including the operation
of the Company.
Financial Reporting Council ("FRC")
The FRC regulates UK auditors and provides guidance to accountants with the aim
of promoting better transparency and integrity in the Annual Reports of quoted
businesses.
Gearing
Gearing refers to the ratio of the Company's debt to its equity capital. The
Company may borrow money to invest in additional investments for its portfolio.
If the Company's assets grow, the shareholders' assets grow proportionately
because the debt remains the same. If the value of the Company's assets falls,
the situation is reversed. Gearing can therefore enhance performance in rising
markets but can adversely impact performance in falling markets.
Group
The Company and its subsidiary; DIT Income Services Limited.
Growth Stock
A stock where the earnings are expected to grow at an above-average rate,
leading to a faster than average growing share price. Growth stocks do not
usually pay a significant dividend.
International Financial Reporting Standards ("IFRS")
Generally Accepted Accounting Principles ("GAAP") are a common set of
accounting principles, standards and procedures that companies follow when they
compile their financial statements. GAAP is a combination of authoritative
standards (set by policy boards) and the commonly accepted ways of recording
and reporting accounting information. This enables the financial results of
companies to be determined on a common basis so they are able to be compared.
In the UK, company accounts must be prepared in accordance with applicable
company law, this being the Companies Act 2006, which recognises GAAP. IFRS are
standards issued by the International Accounting Standards Board ("IASB"),
approved for implementation to provide a common global language for business
affairs so that company accounts are understandable and comparable across
international boundaries. These were previously International Accounting
Standards ("IAS") maintained by the IASB. The Company adopted IFRS with the
accounting policies of the Company set out in the financial statements.
Key Performance Indicators ("KPIs")
KPIs are a short list of corporate attributes that are used to assess the
general progress of the business and are outlined in the Strategic Report
above.
Net Asset Value per Ordinary Share ("NAV")
The NAV is shareholders' funds expressed as an amount per individual share.
Shareholders' funds are the total value of all of the Company's assets, at
their current market value, having deducted all liabilities and prior charges
at their par value, or at their asset value as appropriate. The total NAV per
share is calculated by dividing the NAV by the number of ordinary shares in
issue excluding treasury shares.
Ongoing Charges
As recommended by the AIC in its guidance, ongoing charges are the Company's
annualised revenue and capital expenses (excluding finance costs and certain
non-recurring items) expressed as a percentage of the average monthly net
assets of the Company during the year. The ongoing charges calculation is
provided above.
Peer Group
Diverse is part of the AIC's UK Equity Income Investment Trust sector. The
trusts in this universe are defined as trusts whose investment objective is to
achieve a total return for shareholders through both capital and dividend
growth. Typically, the funds will have a yield on the underlying portfolio
ranging between 110% and 175% of that of the FTSE All-Share Index. They will
also have at least 80% of their assets in UK listed securities.
Put Option
Put options are most commonly used in the stock market to protect against the
decline of the price of a stock below a specified price likened to purchasing a
form of financial insurance. An owner of a Put option can collect a financial
benefit after an adverse event, with the scale of the benefit proportionate to
the setback in the market and the remaining term of the cover.
Senior Independent Director ("SID")
The SID is a non-executive director who can be contacted by investors to
discuss a matter of governance when it concerns the Chairman and the normal
practice cannot be followed. The Company's SID is currently Calum Thomson.
Total Assets
Total assets include investments, cash, current assets and all other assets. An
asset is an economic resource, being anything tangible or intangible that can
be owned or controlled to produce value and to produce positive economic value.
Assets represent the value of ownership that can be converted into cash. The
total assets less all liabilities will be equivalent to total shareholders'
funds.
Total Return - NAV and Share Price Returns
Total return statistics enable the investor to make performance comparisons
between investment trusts with different dividend policies. The total return
measures the combined effect of any dividends paid, together with the rise or
fall in the share price or NAV. This is calculated by the movement in the share
price or NAV plus dividend income reinvested by the Company at the prevailing
NAV.
Page 31 May 31 May
NAV Total Return 2021 2020
118.31 88.82
Closing NAV per share (p) 4
Add back total dividends paid in the year ended 3.70 3.91
31 May 2021 (2020) (p) 71
Adjusted closing NAV (p) 122.01 92.73 (a)
Opening NAV per share (p) 4 88.82 95.17 (b)
NAV total return unadjusted 37.4 (2.6) (c)
(c = ((a-b)/b) x 100) (%)
38.4 (2.5)
NAV total return adjusted %*
Page 31 May 31 May
Share Price Total Return 2021 2020
119.00 84.00
Closing share price (p) 4
Add back total dividends paid in the year ended 3.70 3.91
31 May 2021 (2020) (p) 71
Adjusted closing share price (p) 122.70 87.91 (a)
Opening share price (p) 4 84.00 89.00 (b)
Share price total return unadjusted 46.1 (1.2)
(c = ((a-b)/b) x 100) (%) (c)
47.6 (1.2)
Share price total return adjusted %*
* Based on NAV/share price movements and dividends being reinvested at the
relevant cum dividend NAV/share price during the year. Where the dividend is
invested and the NAV/share price falls, this will further reduce the return or,
if it rises, any increase will be greater. The source is Morningstar who have
calculated the return on an industry comparative basis.
Volatility
The term volatility describes how much and how quickly the share price or net
asset value of an investment has tended to change in the past. Those
investments with the greatest movement in their share prices are known as
having high volatility, whereas those with a narrow range of change are known
as having low volatility.
Yield Stock
Yield stocks pay above-average dividends to shareholders. If the dividend
grows, and the yield on the share remains constant, the share price will
increase. Companies which grow their dividends faster than average are capable
of delivering faster share price growth.
ANNUAL GENERAL MEETING
The Company's Annual General Meeting will be held on Wednesday, 20 October 2021
at 11.30am, at the offices of Stephenson Harwood LLP, 1 Finsbury Circus, London
EC2M 7SH.
NATIONAL STORAGE MECHANISM
A copy of the Annual Report and Accounts will be submitted shortly to the
National Storage Mechanism ("NSM") and will be available for inspection at the
NSM, which is situated at: https://data.fca.org.uk/#/nsm/
nationalstoragemechanism
ENDS
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on this announcement (or any other website) is
incorporated into, or forms part of, this announcement.
LEI: 2138005QFXYHJM551U45
END
(END) Dow Jones Newswires
August 10, 2021 02:00 ET (06:00 GMT)
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