Unicorn Outstanding British Companies – September 2020 fund update

Dominic Rowles | Wed 30 September 2020

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• Unicorn is a specialist smaller companies investor and we think the group has a real niche in this area
• Chris Hutchinson has a great long-term track record, boosted by his ability to select outstanding businesses
• His preference for high-quality businesses helped the fund beat the performance of the broader UK stock market so far this year*
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

The Unicorn Outstanding British Companies Fund aims to grow your money over the long run by investing in high-quality UK companies of all sizes, although it invests more in small and medium-sized companies than most other UK funds. We think smaller businesses have great long-term potential, but they're higher-risk. This fund could be a great addition to a more adventurous portfolio, or work well alongside funds focused on bigger businesses.

Manager

Chris Hutchinson has two decades of experience investing in and researching smaller companies. He also has experience managing VCTs (Venture Capital Trusts) which invest in early-stage businesses that need investment 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 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 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 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 financial 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 over the long term 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 businesses over a period of five years or more.

Truly outstanding companies are hard to come by, and the managers don’t think there are many out there. They tend to invest in a fairly small number of companies. It means each one can make a big contribution to performance, but it's a higher-risk approach.

When the coronavirus pandemic began to spread across the globe earlier this year, the managers reviewed every one of the fund's investments, paying particular attention to financial strength and security of earnings. As a result of the review, the managers sold their investments in defence engineering business Babcock International and chemicals company Johnson Matthey. The managers feel the longer-term prospects of both businesses have been damaged by the coronavirus crisis. The managers also reduced investments in companies whose shares are considered particularly illiquid (difficult to trade).

In contrast, they added to an investment in healthcare facilities owner Primary Health Properties. The importance of healthcare has been brought into sharp focus in recent months and the managers expect demand for healthcare property to increase over the long term as the population ages.

Unicorn has lots of exposure to smaller companies listed on the Alternative Investment Market (AIM). In recent years, there have been suggestions the government could cut some of the tax benefits that investors in these companies currently enjoy. No change has been introduced yet, 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 40% invested in 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 and past performance is not a guide to the future.

Culture

Unicorn specialises in smaller companies. 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.

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. It means managers can 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 means it’s more agile and the managers can quickly take advantage of 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 HL clients pay an 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 better than the broader UK stock market so far this year, although it still lost money. A lack of exposure to oil & gas producers and large UK banks boosted performance as these sectors did poorly on the whole.

The managers' preference for high-quality companies in a strong financial position means we typically expect the fund to hold up a bit better when markets fall, and this has been the case so far this year. However the fund could also underperform when markets rise rapidly.

The fund's long-term performance has also been impressive. It's significantly outperformed 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. Remember all investments fall as well as rise in value, so you could get back less than you invest.

Past performance isn't a guide to the future. Source: *Lipper IM 31/08/2020.

Find out more about Unicorn Outstanding British Companies including charges

Unicorn Outstanding British Companies Key Investor Information