"Good dividend payers will outperform despite Brexit"

Because mega-caps have performed strongly recently Mr Williams is more interested in opportunities among small and mid-caps for Diverse Income Trust, which is a multi-cap fund. Examples include Sepura (SEPU), which makes digital radios for services including the police and fire brigade, and has extensive overseas operations. The company recently completed a rights issue and its share price has dropped over the past month. However, Mr Williams says it has good prospects in overseas markets such as the US, and one of two prospective contracts that were recently delayed is now going ahead.

He also expects Sepura to pay dividends next year and grow them, and likes its low-risk balance sheet and low entry price - its shares cost about 49p, although recently were as low as 34p. And as the company reports in euros it is benefiting from the weakening in Sterling, when its returns are translated back to the domestic currency.

Zotefoams (ZTF), which makes cellular materials for use in areas such as sports and leisure, packaging, transport, medical and industrial, took a share price hit in the recent volatility. But Mr Williams says its profit margins could increase. The company has done well so far, for example in 2015 its revenue grew 11 per cent and its profits grew 14 per cent.

"It's too early to say exactly which companies will thrive and which companies will suffer after Brexit, but it is important to note that in previous recessions it was the more nimble smaller companies that outperformed their larger peers," says Mr Williams.

Examples of portfolio holdings that have proved themselves in the past include 4imprint (FOUR), which markets promotional products such as pens, bags, drinkware, embroidered clothing and business gifts, and derives most of its revenues from the US. "This company has enhanced the value of its business and share price, and grown its dividend considerably," says Mr Williams.

Multi-cap approach

Diverse Income Trust has a strong long-term performance record, but over one year has underperformed the FTSE All-Share. One reasons for this is its allocation across the market cap spectrum - it only has 16 per cent of its assets in the each of the FTSE 100 and FTSE 250, but 35.7 per cent in the Alternative Investment Market (AIM). Large-cap shares such as Royal Dutch Shell (RDSA), BP (BP.) and BHP Billiton (BLT) have been among the strongest performers since the Brexit vote, and although the trust has held since before the vote, it is in relatively small proportions. This means it is generally uncorrelated to major indices such as the FTSE All-Share and FTSE 100.

The devaluation of sterling versus the US dollar means that some of these large companies will now generate dividend growth in sterling terms, but Mr Williams does not plan to increase exposure to large-caps further. He increased the weighting to the FTSE 100 earlier this year when markets were weak to build up exposure to multinational companies.

"Smaller companies have more opportunities to grow their sales and profits," he explains. "There has been a setback over the past six weeks, but if dividend growth comes through this segment of the market will do well in future. I expect smaller companies to have a catch-up which could happen in the coming weeks."

He hasn't added many new holdings in the recent market volatility, but has topped up some core holdings.

Mr Williams is confident that Diverse Income Trust can continue to increase its dividends as its holdings "continue to trade well and many have international businesses".

He also highlights the trust's revenue reserve, which it reported in its last half-year results as being £9.2m, or about 85 per cent of the annual cash cost of the four dividends paid. Mr Williams adds that the trust has managed annual dividend growth of about 5-7 per cent a year and "hopefully this can continue this year and in future years".

In its current financial year the trust has paid two interim dividends of 0.65p, up from 0.5p in the equivalent periods last year. It has also declared a 0.75p third interim dividend.

Its attractive income profile means the trust still trades at a premium to net asset value (NAV) of nearly 5 per cent, although it did swing out to a discount after the Brexit vote. Before this it mostly traded at a premium.

The trust doesn't hold many consumer discretionary shares, one exception being top 10 holding Shoe Zone (SHOE). "Its share price has fallen since the vote for Brexit, but it is at the value end of its market so it might benefit if people become more conscious on costs [should there be an economic slowdown]," explains Mr Williams. "It also has a very strong balance sheet, paid a special dividend of 6p a share last year and has a 5.4 per cent yield. [But] on 24 June we sold those companies we had identified as likely losers in the event of a vote to Brexit, such as Persimmon (PSN), Taylor Wimpey (TW.), ITV (ITV) and EasyJet,"(EZJ)."

The trust's largest holding is a FTSE 100 put option which gives the option of selling this index. Mr Williams says: "If the FTSE 100 goes below 6000 that is when it is real value, although we haven't sold it yet because we do not consider this is the worst it could get - this is for a serious sell-off."

Source: Winterflood, *Miton

Performance

Source: Winterflood as at 19 July 2016

Top ten holdings as at 31 May 2016 (%)

Market cap breakdown (%)