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    DIVI   GB00B65TLW28

DIVERSE INCOME TRUST

(DIVI)
Delayed Quote. Delayed London Stock Exchange - 10/19 11:35:13 am
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Diverse Income Trust : Annual Financial Report

08/10/2021 | 02:01am EDT

THE DIVERSE INCOME TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 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/declared 3.75p 3.70p 1.4%
Ongoing charges (further details below)* 1.06% 1.09%
Ordinary shares in issue         361,445,105 378,289,047

* 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 Shares 239.75
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


Rank     Company
Sector &
main activity
Valuation
£000
% of
net assets
Yield1
1            CMC Markets Financials 15,820 3.7 4.4 
2            K3 Capital2 Financials 10,390 2.4 1.8 
3            Kenmare Resources Basic Materials 8,881 2.1 1.7 
4            888 Consumer Discretionary 8,300 1.9 3.2 
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 Capital Financials 5,529 1.3 2.5 
10          MAN Financials 5,421 1.3 3.1 
Top 10 investments 79,443 18.6
11          Randall & Quilter2 Financials 5,371 1.3 5.0 
12          Amino Technologies2 Telecommunications 5,342 1.2 1.3 
13          Sainsbury (J) Consumer Staples 5,234 1.2 4.0 
14          DRAX Utilities 5,213 1.2 3.9 
15          Morrison (WM) Supermarkets Consumer Staples 5,205 1.2 3.9 
16          Diversified Energy2 Energy 5,173 1.2 10.7 
17          FRP Advisory2 Industrials 5,142 1.2 2.2 
18          Direct Line Insurance Financials 5,066 1.2 7.4 
19          Inspiration Healthcare2 Health Care 5,065 1.2 0.4 
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 Discretionary 4,594 1.1 – 
29          BT Telecommunications 4,585 1.1 – 
30          Pan African Resources2 Basic Materials 4,515 1.0 3.0 
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 Publishing Consumer Discretionary 4,320 1.0 2.5 
34          XPS Pensions Financials 4,301 1.0 5.0 
35          Persimmon Consumer Discretionary 4,290 1.0 3.5 
36          Jadestone Energy Energy 4,213 1.0 – 
37          Polymetal International Basic Materials 4,179 1.0 5.4 
38          Forterra Industrials 4,134 1.0 1.0 
39          M&G Financials 4,114 1.0 7.5 
40          Concurrent Technologies2 Technology 4,088 0.9 2.8 
Top 40 investments 221,155 51.7
Balance held in 88 equity investments 191,413 44.8
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 income £15.5 million
%
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 fees 0.04 0.04
Directors/Auditor/Depositary/Registrar/Custodian and Stockbroker fees 0.10 0.12
All other direct costs, including VAT on the fees above, plus marketing, legal, printing, insurance and bank charges 0.07 0.07

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 share Mid-market price
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 2021            Year ended 31 May 2020
Notes Revenue 
Return 
£000 
Capital  return 
£000 
Total 
£000 
Revenue 
Return 
£000 
Capital     return 
£000 
Total 
£000 
Gains(losses) on investments held at fair value through profit or loss 12 –  106,793  106,793  –  (32,881) (32,881)
Foreign exchange losses               –             (12)           (12)                –              (33)            (33)
Gains on derivatives held at fair value through profit or loss         13 –  –  –  –  13,674  13,674 
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 taxation 13,947  105,733  119,680  12,516  (21,474) (8,958)
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 tax now irrecoverable –  –  –  (59) –  (59)
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 2020 428  192,562 6 40,530  87,443 15,041  336,010 
Total comprehensive income:
Net return for the year –  –  105,648 13,380  119,028 
Transactions with shareholders recorded directly to equity:
Issue of ordinary shares 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 15,174  427,642 

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 2019 434  192,562 45,775  108,999  17,470  365,240
Total comprehensive income:
Net return for the year –   –  (21,556) 12,362  (9,194)
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  15,041  336,010

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 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


Notes
Group 
31 May 2021 
£000 
Group 
31 May 2020 
£000 
Company 
31 May 2021 
£000 
Company 
31 May 2010 
£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)

Net current assets
12,819  25,612  11,923  24,627 
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  26 
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 
31 May 2021 
£000 
Group 
31 May 2020 
£000 
Company 
31 May 2021 
£000 
Company 
31 May 2020 
£000 
Operating activities:
Net return before taxation 119,567  (9,068) 119,656  (9,153)
(Gains)/losses on investments and derivatives held at fair value through profit or loss (106,793) 19,207  (106,793) 19,207 
Finance costs 113  112  113  112 
Decrease in trade and other receivables 441  76  441  76 
Increase/(decrease) in trade and other payables 67  (33) (69) 52 
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 paid (20) (20) (20) (20)
Revolving credit facility non-utilisation fee paid (93) (92) (93) (92)
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 the year 25,816  27,495  25,816  27,495 
Net cash outflow from cash and cash equivalents (14,437) (1,679) (14,484) (1,679)
Cash and cash equivalents at the end of the year 11,379  25,816  11,332  25,816 

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
31 May 2021
Year ended
 31 May 2020
Revenue 
£000 
Capital
£000
Total 
£000 
Revenue
£000
Capital
£000
Total
£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 subsidiary* (88) - (88) 85 - 85
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
31 May 2021
Year ended
31 May 2020
Revenue
£000
Capital
£000
Total
£000
Revenue
£000
Capital
£000 
Total
£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
31 May 2021
£000
Year ended
31 May 2020
£000
Fund Administration and Secretarial services 127 125
Audit of the Group’s financial statements (payable - BDO LLP 38 -
by the Company only) - Ernst & Young LLP - 40
Directors’ fees (see the Directors’ Remuneration Report in the full Annual Report) 163 180
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
£000
Capital
£000
Total
£000
Revenue
£000
Capital
£000
Total
£000
£20m (2020: £20m) revolving loan facility arrangement fee 5 15 20 5 15 20
£20m (2020: £20m) revolving loan facility non-utilisation fee 23 70 93 23 67 90
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
31 May 2021
Year ended
31 May 2020
Revenue
£000
Capital 
£000 
Total 
£000 
Revenue
£000
Capital 
£000 
Total 
£000 
Prior years recoverable WHT now written off - 59 59
Overseas withholding tax suffered 539 539 67 67
Total overseas withholding tax suffered 539 539 126 126

   

Year ended
31 May 2021
Year ended
31 May 2020
Revenue 
£000 
Capital 
£000 
Total 
£000 
Revenue 
£000 
Capital 
£000 
Total 
£000 
Return on activities before taxation 13,919  105,648  119,567  12,488  (21,556) (9,068)
Theoretical tax at UK corporation tax rate of 19% (2020: 19%) 2,645  20,073  22,718  2,373  (4,096) (1,723)
Effects of:
UK dividends that are not taxable (2,019) (2,019) (1,966) (1,966)
Overseas dividends that are not taxable (749) (749) (530) (530)
Unrelieved losses 17  17  -
Non-deductible investment losses (20,525) (20,525) 3,656  3,656 
Overseas taxation suffered 539  539  67  67 
Overseas tax – prior year’s recoverable tax written off 59  59 
Double tax relief expensed in current period 11  -  11 
Unrelieved expenses 95  452  547  121  440  561 
Actual current tax charge 539  539  126  126 

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) (£’000) 13,380 105,648 119,028 12,362 (21,556) (9,194)
Weighted average number of ordinary shares in issue 358,929,991 378,484,338
Return per ordinary share (pence) 3.73 29.43 33.16 3.27 (5.70) (2.43)

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

£000
pence
per share

£000
pence
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 the year 13,247 3.70 14,791 3.91

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
31 May 2021
Year ended
31 May 2020
Revenue available for distribution by way of dividends for the year 13,469 12,277
First interim dividend 0.85p (2020: 0.85p) per ordinary share (3,043) (3,215)
Second interim dividend 0.90p (2020: 0.90p) per ordinary share (3,222) (3,405)
Declared third interim dividend 0.90p (2020: 0.90p) per ordinary share (3,253) (3,222)
Proposed final dividend of 1.10p (2020: 1.05p) per ordinary share (3,976) (3,759)
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 
Cancellation of ordinary shares (20,243,942) (20) (5,498,192) (6)
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




2021
Share
premium
account
£000
Capital redemption reserve
£000

Special*
reserve 
£000 
Capital    reserve 
realised 
£000 
Capital
reserve
unrealised
£000

Revenue*
reserve 
£000 
Opening balance 192,562 6 40,530  84,663  2,780 15,041 
Issue of ordinary shares 4,000 - -   -
Cancellation of ordinary shares - 20 (18,152) -
Profit on realisation of investments - - 20,045  -
Exchange losses on settlements and currency accounts - - (12) -

 - 
Capital dividends - - 1,245  -
Unrealised net increase in value of investments - - 86,748
Management fees/finance costs charged to capital - - (2,378) -
Equity dividends paid - - - (13,247)
Revenue return on ordinary activities after tax - - - 13,380 
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).




2020
Share
premium
account
£000
Capital redemption reserve
£000
Special 
reserve 
£000 
Capital    reserve 
realised 
£000 
Capital 
reserve 
unrealised 
£000 
Revenue 
reserve 
£000 
Opening balance 192,562 - 45,775  84,034  24,965  17,470 
Cancellation of ordinary shares - 6 (5,245)
Net loss on realisation of investments - - (10,256)
Exchange losses on settlements and currency accounts - - (33)

Unrealised net decrease in value of investments - - (22,625)
Movement in value of derivative instruments - - 13,234  440 
Management fees/finance costs charged to capital - - (2,316)
Equity dividends paid - - (14,791)
Revenue return on ordinary activities after tax - - 12,362 
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
per share
31 May 2021
pence
Net assets
attributable
31 May 2021
£000
Net asset value
per share
31 May 2020
pence
Net assets
attributable
31 May 2020
£000
Opening balance
- Basic and diluted
118.31 427,642 88.82 336,010

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
£000
31 May 2020
£000
Investment portfolio summary:
Opening book cost 307,618 300,843
Opening investment holding gains 2,780 25,405
Total investments classified at fair value 310,398 326,248

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 fair value 414,823  310,398

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
31 May 2021
£000
Year ended
31 May 2020
£000
Transaction costs:
Costs on acquisitions 393 554
Costs on disposals 68 82
461 636

   

Year ended 
31 May 2021 
£000 
Year ended 
31 May 2020 
£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
£000
Level 2
£000
Level 3
£000
Total
£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
£000
Level 2
£000
Level 3
£000
Total
£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 
31 May 2021 
Level 3 
£000 
Year ended 
31 May 2020 
Level 3 
£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 or loss at 31 May 2020 Year ended 
31 May 2021 
£000 
Year ended 
31 May 2020 
£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
£000
31 May 2020
£000
31 May 2021
£000
31 May 2020
£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 debtors 86 90 86 90
1,877 2,717 1,877 2,717

17 Trade and Other Payables

Group Company
31 May 2021
£000
31 May 2020
£000
31 May 2021
£000
31 May 2020
£000
Amounts due to brokers - 2,551 - 2,551
Amounts due to subsidiary - - 849 985
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
average
interest
rate
%
Floating rate
£000
Fixed
rate
£000
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
rate
%


Floating
rate
£000



Fixed rate
£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    
£000    
2020   
£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                    427,642   336,010   
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.


Premium/(Discount) Calculation

Page
31 May 
2021 
31 May  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 100) (%) 4 0.58 (5.43)  (c)

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.


NAV Total Return
Page 31 May 
  2021 
31 May 
2020 

Closing NAV per share (p)

4
118.31 88.82
Add back total dividends paid in the year ended 31 May 2021 (2020) (p)
71
3.70 3.91
Adjusted closing NAV (p) 122.01 92.73 (a)
Opening NAV per share (p) 4 88.82 95.17 (b)
NAV total return unadjusted
(c = ((a-b)/b) x 100) (%)
37.4 (2.6) (c)

NAV total return adjusted %*
38.4 (2.5)

   


Share Price Total Return
Page 31 May 
2021 
31 May 
2020 

Closing share price (p)

4
119.00 84.00     
    
Add back total dividends paid in the year ended 31 May 2021 (2020) (p)
71
3.70 3.91
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
(c = ((a-b)/b) x 100) (%)
46.1 (1.2)
(c)

Share price total return adjusted %*
47.6 (1.2)

* 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


© PRNewswire 2021
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