Unicorn Outstanding British Companies: April 2020 fund update

Dominic Rowles | Thu 30 April 2020

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  • Unicorn are specialist smaller companies investors and we think they have a real niche in this area
  • Chris Hutchinson has been analysing and investing in UK companies for two decades
  • He's got a great long term track record, boosted by his ability to select outstanding businesses

How it fits in a portfolio

This fund aims to deliver long-term growth by investing in high-quality UK companies of all sizes. It invests more in small and medium-sized companies than most other UK funds. We think they have great long-term growth potential, but they are higher-risk. The fund could be a good addition to a more adventurous investment portfolio, or work well alongside other funds focused on bigger businesses.

Manager

Chris Hutchinson has two decades' worth of experience investing in and researching smaller companies. He also has experience in managing VCTs (Venture Capital Trusts) which invest in early-stage businesses that need investment in order to develop and grow. The Unicorn Outstanding British Companies Fund gives him the flexibility to invest in companies of any size, and we think he's done a good job since the fund's launch in December 2006.

Hutchinson manages this fund alongside the Unicorn AIM VCT. He also serves as a Director of Unicorn Asset Management. We think this is a manageable workload, particularly given there is a degree of research coverage overlap between the two portfolios.

Hutchinson is supported by assistant fund manager Max Ormiston. He's been a member of the Unicorn investment team since joining the firm in 2014, and formerly spent four years with Brewin Dolphin where he worked as an investment manager. We think Ormiston is a capable investor, but our conviction rests with Hutchinson.

The duo are also supported by the wider Unicorn investment team.

Process

Hutchinson and Ormiston look for five main things in the companies they invest in:

Simplicity – businesses that are easy to understand and sell products and services that customers couldn’t do without. Many of the companies they invest in operate in niche areas, which often go overlooked by the larger firms.

Consistency – businesses that have a strong track record of growing earnings, revenues and dividends over the long term.

Transparency – the managers must be able to understand the company's accounts in full. They like to see companies stick to what they know and focus on growing their business over the long term. Ideally, they should under promise and over deliver, not the other way around.

Alignment – founders and management should retain a meaningful stake in their own businesses after listing on the stock market. This ensures management teams are more risk adverse. They focus on growing the business and appropriately rewarding shareholders through dividends.

Permanence – they're not looking for businesses that grow quickly in the short term because they're trendy or fashionable. They want to be long term partners with a businesses over a period of five years or more.

The managers don’t think there are many truly outstanding businesses out there, so they tend to invest in relatively few companies. It means each one can make a big contribution to performance, but it's a higher-risk approach.

Current investments include Keystone Law. It offers legal services to small and medium-sized businesses. What makes it unique is that its lawyers are self-employed. They have no fixed salary but get to keep 75% of their billings. The company's directors own a significant number of its shares too. It's disrupting the entire legal profession and its share price has risen strongly in recent years, although it was impacted by the recent coronavirus panic.

Unicorn has lots of exposure to smaller companies listed on the Alternative Investment Market (AIM). In recent years, there have been suggestions that the government could cut some of the tax benefits that investors in these companies currently enjoy. Thus far, no such change has been introduced, but the share prices of some AIM-listed companies could suffer if investors' tax breaks are cut in the future. The Unicorn Outstanding British Companies Fund has around 37% exposure to AIM-listed companies. We're encouraged that the managers' investments in this area have made great returns for investors over the years and it's a market they know well. But investments in AIM-listed companies add risk.

Culture

Unicorn are specialist smaller companies investors. Companies will often transition from Unicorn's VCT product, through its Smaller Companies fund and on to the Outstanding British Companies fund as they grow larger. This allows the managers to build strong, long lasting relationships with the companies they invest in. We think this detailed knowledge gives them an edge over other investors.

Overall, Unicorn is a smaller operation than many of its competitors but they outsource any functions not considered core to managing investors' money, such as sales and marketing. This allows fund managers to focus on their fund management responsibilities. The Unicorn Outstanding British Companies Fund is also smaller than many of its peers in the IA UK All Companies sector. This makes it more agile and means the managers can quickly pounce on new opportunities as soon as they become available.

The Unicorn investment team has remained stable over the years. Hutchinson and many other Unicorn fund managers are shareholders in the business meaning they're dedicated to its long term success. Overall we're comfortable that the managers' interests are aligned with those of investors.

Cost

This fund has an ongoing annual charge of 0.84%, but we've secured HL clients an ongoing saving of 0.35%. This means you pay a net ongoing charge of 0.49%. This makes it one of the cheapest active funds in the UK Growth sector available through HL. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund's performed much better than the broader UK stock market since launch in 2006. We put this down to the managers' ability to select companies with great prospects, regardless of what size they are or industry they operate in.

Their focus on higher-quality companies means we'd expect the fund to shelter investors' money when stock markets are falling. But it's likely to underperform if markets are rising rapidly. Investments in smaller companies could make the fund more volatile than peers focused on larger businesses though. They also tend to be more sensitive to the health of the UK economy.

Brexit and other political uncertainty meant that small and medium-sized companies have generally been held back in recent years, while larger companies, which tend to earn more money overseas, did better. The fund's investments in smaller companies, and a lack of exposure to larger companies, dampened performance.

The UK Stock market has been volatile so far this year and ultimately lost money. The fund's lack of exposure to oil & gas businesses, which performed particularly poorly, helped the fund outperform the broader UK market.

Annual percentage growth
Mar 15 -
Mar 16
Mar 16 -
Mar 17
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Unicorn Outstanding British Companies 8.0% 9.4% 7.1% 2.7% -13.5%
FTSE All-Share -3.9% 22.0% 1.2% 6.4% -18.5%

Past performance is not a guide to the future. Source: Lipper IM to 31/03/2020.

Find out more about this fund including charges

Key investor information

Important information

Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice.

No news or research item is a personal recommendation to deal.

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