Unicorn UK Income Fund research update
Richard Troue | Tue 17 March 2015
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Fraser Mackersie and Simon Moon took over management of the Unicorn UK Income Fund in June 2014, though they have been involved in its management since 2008. They have maintained the fund's distinctive philosophy since being appointed lead managers.
Fraser Mackersie and Simon Moon invest in companies of all sizes, but primarily higher-risk smaller companies. At times over 70% of the fund has been invested in smaller companies, although this exposure has reduced over time. Exposure to smaller companies currently accounts for 45% of the fund's income. In contrast, many UK Equity Income funds focus on the FTSE 100 which pays 89% of all UK dividends.
*Figures to 30/01/2015
The managers see a number of advantages to investing in smaller companies. They are usually less widely researched, meaning price discrepancies occur more often giving rise to opportunities missed by other investors. Furthermore, by taking income from companies of all sizes, they hope to offer a dividend uncorrelated to other UK Equity Income funds. The fund has a historic yield of 5.4% although please note this is variable and not guaranteed.
Having excelled since the global financial crisis, small and medium-sized companies struggled in 2014 and the fund underperformed last year. The managers believe the falling prices created investment opportunities. Secure Trust Bank, a favourite holding, tumbled in 2014. The company offers retail banking services and is well capitalised with a growing customer base. There are only three professional brokers researching it, and the managers believe the falls were unjustified. They seized the opportunity to buy more shares which have since bounced back strongly.
| Annual percentage growth | |||||
|---|---|---|---|---|---|
| Mar 10 -
Mar 11 |
Mar 11 -
Mar 12 |
Mar 12 -
Mar 13 |
Mar 13 -
Mar 14 |
Mar 14 -
Mar 15 | |
| Unicorn UK Income | 42.62% | 1.05% | 34.53% | 31.06% | 0.22% |
| IA UK Equity Income | 15.47% | 2.03% | 14.88% | 16.87% | 7.73% |
| FTSE All-Share TR | 14.83% | 3.42% | 13.26% | 11.20% | 7.15% |
Past performance is not a guide to future returns. Source: Lipper IM* to 02/03/2015
A number of larger companies were added to the portfolio last year, as the managers believed this area of the market represented greater value. In June they accounted for 10% of the fund, but most of these holdings have now been sold. Only 4% of the fund is now in larger companies. They were positive contributors to performance in 2014 but the managers believe the value in smaller companies merits returning to this area. That said, they are prepared to hold larger companies that offer the same income and earnings growth potential expected from their smaller company holdings.
Investing in smaller companies can provide the best exposure to emerging themes. Expecting online retailing to drive demand for packaging and delivery services, the managers invested in Clipper Logistics in June. The company facilitates online deliveries for Asos, John Lewis, and others. Royal Mail listed at the same time but the managers believe growth in the parcel business will be tempered by their diminishing letter business. The industry is evolving rapidly and Clipper Logistics can adapt quickly to benefit. Unlike larger competitors they are unencumbered by historic commitments, systems or entrenched structures.
Our view on this fund
As a group, Unicorn Asset Management has built a strong track record investing in the higher-risk smaller companies arena. We believe this focus could offer useful diversification from traditional equity income funds which tend to focus on larger companies. Indeed, performance has differed markedly from the rest of the IA UK Equity Income sector at times. With 46 holdings, this is also a higher-risk concentrated portfolio which should accentuate the impact of the managers' stock selection decisions.
The fund is not currently part of the Wealth 150 list of our favourite funds across the major sectors. We are positive on the outlook, but would like to assess the managers' abilities over a longer period. We will continue to monitor their progress with interest.
Please note the fund's charges can be taken from capital, which can increase the yield but reduce the potential for capital growth.
Find out more about this fund including how to invest
Please read the key features/key investor information document in addition to the information above.