The benefits of diversification

Since the start of the Diverse Income Trust’s new financial year in June, equity market returns have shown relatively strong returns. In part this reflects the ongoing expansion of Artificial Intelligence (AI), which has coincided with higher earnings and valuations for the group of technology companies often referred to as the of the Magnificent 7 or the “Mag7”. Over the past five months, these companies have risen by 34,2% in sterling terms.

Source: Bloomberg Magnificent 7 Total Return Index rebased to 100 in Sterling 31.05.25 - 30.10.25. The performance information presented on this page relates to the past. Past performance is not a reliable indicator of future returns.

Shares such as the Mag7, which mainly generate most of their return from capital growth through increases in their share prices, currently make up a large portion of many equity portfolios. With geopolitical uncertainty rising, some global investors are becoming more cautious about how much their portfolio is focused on companies concentrating primarily on capital growth.

However, some of the stronger performing UK shares recently have been low-beta equity income shares, which means they are less volatile than the overall stock market and deliver much of their return via dividend income. This includes financial companies such as banks, where lending margins have risen more than expected because precautionary extra saving by consumers have reduced the level of interest rate that banks pay for deposits. We have accordingly taken some profits in the trust’s holding in NatWest, for example. In addition, some large UK life insurance stocks with growing dividends, such as Aviva, have also performed strongly.

Our assumptions about the likelihood of increased geopolitical risks in future have not changed significantly. Global growth may have lasted longer than expected, but we believe it may moderate over time. Diversification remains central to our strategy, and the trust’s portfolio therefore has a relatively low weighting compared to others in IT UK Equity Income sector that benefit most from global growth, such as industrial goods and certain consumer products. Conversely, bottle necks in the supply of commodities, such as metals, could become acute, creating potential for sharp price increases. The portfolio includes positions intended to reflect this possibility.

Source: Bloomberg: Greatland Gold share price rebased to 100 in Sterling 31.12.25 - 30.10.25

The materials sector has been the strongest contributor to returns for the Diverse Income Trust, supported by the rise of the price of gold, since the beginning of January is up 53% as at the end of October 2025. We featured gold miner Greatland Gold in the Trust’s annual report, highlighting that the company had recently taken its ownership in the part-built Australian Havieron Mine up to 100%, for which the company paid a price that we believed was a fraction of its fundamental worth.

Although Greatland Gold is not expected to pay a dividend until the mine becomes operational, once operational it may have the cash generation necessary to pay substantial and growing dividends. In the near term, however, the continuing strength in the gold price has led us to realising some profit in these shares. In certain market conditions, companies may reduce or even suspend paying dividends until conditions improve. This will impact the level of income distributed by the Diverse Income Trust.

Source: Bloomberg London Metal Exchange Copper spot price rebased to 100 in Sterling 01.01.25 - 30.10.25

However, whilst investors are currently focusing on the appreciation of the gold price, we are increasingly concerned about a potential shortage of global copper supply. Demand is growing due to electric vehicles, data centres and higher defence spending, but there have been relatively few new copper mines opened in recent years. Copper smelters have become so short of copper concentrate that, rather than mining companies paying for smelting, the smelters are paying to obtain concentrate to keep their furnaces operating. A recent accident at the Grasberg Block Cave mine, a large copper mine jointly owned by the Indonesian government and a US company, may further tighten global copper supplies, as it is likely to be some time before this large mine resumes operations.

Against this background, we have increased the trust’s holdings in the Atalaya Mining and Jubilee Metals, which own copper mines in Spain and sub-Saharan Africa respectively, and initiated a position in ACG Metals, operator of a large new Turkish copper mine. As a result, at the end of October, the basic materials sector, which includes mining companies, represented around 14% of the Diverse Income Trust portfolio. While these companies currently contribute little or nothing to the trust’s income stream from a dividend-paying perspective, as cash generation increases, we believe they have the potential to make a meaningful contribution over time. In the meantime, they illustrate the role of the Diverse Income Trust as a diversifier within investors’ portfolios.

In summary, low-beta equity income stocks offer diversification in portfolios because they typically deliver much of their return through dividend income, and its growth over time. This means that equity income stocks could deliver consistent returns even through periods when equity markets might be gyrating. With global politics shifting from globalisation to nationalism, low beta equity income stocks could perform differently to high-beta growth companies. We believe that the UK stock market, including UK quoted smaller companies, may have considerable short term catch-up potential, and that low beta equity income stocks may outperform very considerably in the long term.

Gervais Williams

Fund manager