PRESENTER: Hello. I’m Claire Long, Head of Investment Trusts at Premier Miton. I’m joined by Gervais Williams, Co-Fund Manager with Martin Turner of the Diverse Income Trust, for a further update on the trust since we last spoke in June, since when the UK economic backdrop has deteriorated and both inflation and interest rates have risen sharply. Gervais, thank you for coming in. Starting with interest rates, what’s been the impact of rising interest rates on the Diverse Income Trust portfolio?

GERVAIS WILLIAMS: Generally asset prices in the stock markets have been coming down, and effectively this has meant that quite a lot of the share prices have fallen. As it happens, most of the companies have continued to trade successfully. We haven’t had many downgrades at this stage. So the companies themselves have become more lowly valued relative to their previous cost base.

PRESENTER: And given the real threat of a recession in the UK, what effects might that have on the companies you invest in: are trading conditions for companies as bad as perhaps their share prices might imply?

GERVAIS WILLIAMS: Well, certainly, we are expecting downgrades. We will think that, inevitably there will be some companies which actually find trading more difficult and there are downgrades to come. So this is a feature of the stock market currently. But against that of course valuations have come down to such an extent that, if anything, they continue to trade successfully. We expect that actually their share prices could recover quite nicely in the future. So, if anything, we think the prospects for the fund have actually become more attractive because it’s coming in, because the current valuations are so low compared to where they were previously.

PRESENTER: You mentioned downgrades there. Can you just clarify what you mean by downgrades?

GERVAIS WILLIAMS: Yes what we’re looking at there is that the profit forecasts which are generated by analysts tend to be changed at times. When they’re reduced, it’s called a downgrade. Profits are expected to be lower. When they improve them of course, that’s an upgrade. The net effect is we’re looking for companies which are actually, hopefully, not going to have too many downgrades, and we’re trying to select for those companies which are going to get upgrades.

PRESENTER: Yes. And you’re hopeful that the UK stock market will perform better than other markets around the world from here. But why should UK investors bother with UK smaller companies, why not just stick with investments in the FTSE 100 for instance?

GERVAIS WILLIAMS: Yes the FTSE 100 actually has held up very well. So it’s actually been a relatively resilient performer at a time when most low global stock markets have been weak. Specifically, many of the quoted companies which are outside the largest companies, less mature businesses but generating surplus cash, paying good and growing dividends, actually the valuations of these have fallen at a time when the mainstream companies have actually held up better. So we would argue the recovery prospects for many of the companies outside the FTSE 100 are actually more attractive than the mainstream companies.

PRESENTER: And how is your quest for income for the trust faring, given rising interest rates and inflation? You’ve said previously you expect things to get tougher, has that been the case?

GERVAIS WILLIAMS: Not a lot at this stage. There have been some profit warnings, but actually, if anything, the slowdown has been perhaps more resilient than perhaps people might have thought. Trading conditions over the Christmas period appear to have been not too bad. So from the point of view of that slowdown, we haven’t seen the effect of the slowdown in the mainstream yet in many of the quoted companies. We still expect that to be a feature. We’ve still got to find the companies which are going to succeed and then hopefully avoid those companies which are going to get into difficulty. And so we are expecting that period to come up. But most particularly as an active, as a fund which where you actively select for companies which you believe are going to achieve these features, we hope to do relatively better than most others in identifying the successful companies going forward.

PRESENTER: So you’re hopeful that the UK stock market may well perform better than other global stock markets. But why should the UK investor bother with UK smaller companies particularly?

GERVAIS WILLIAMS: I think at times of recessions you find that actually fewer companies are succeeding, there’s fewer large companies which are succeeding, but it means if you invest across the whole stock market, including both the larger companies and the less mature businesses, then you’ve got more stocks to pick, and you’ve got more opportunities investing in companies which are not just succeeding but hopefully thriving. And that gives an opportunity to pick out all of those stocks rather than just being restricted to the very largest quoted companies.

PRESENTER: Well, it’ll be interesting to catch up again before long to find out whether that in fact proves to be the case. Thank you very much.

Thank you for listening. For more about the trust, you can go to its website www.diverseincometrust.com, where you will find links to insight notes, videos and before long podcasts as well, and in addition monthly factsheets and the annual report.