McClure (pictured), who heads up the five crown-rated Unicorn UK Income fund, says the vast majority of funds in the sector are invested in the same multi-billion pound companies. While investors may think they are safe investing in these funds, he says they risk disaster if they do not diversify their holdings.
"I didn’t predict that BP was going to blow up – no one could have, but I sort of knew that the banks would fall in 2008 because of the amount of leverage in the system," he said.
"These events show that the large caps can be just as risky as the smaller end of the market."
McClure challenges the view that large cap companies are safer than small caps, because he believes the latter prioritise the interests of their shareholders to a greater extent.
"The goals of the very large corporate management teams are not aligned with those of their shareholders," he said. "It doesn’t matter to them if they raise or cut their dividends."
"However, if you have a guy who has built up his company from the very start, you can bet your bottom dollar that increasing the dividends is very important to him."
"Even if it isn’t important to him personally, it is very important to him for the well-being of his family."
"In the small cap space, we have found companies that have grown their dividends over a very, very long time. There is a company called James Halstead – it has managed to grow its dividend over each of the last 36 years. That’s what I call a blue chip."
McClure says he launched his Unicorn UK Income fund so that investors could have a different option to the large amount of "mirror" funds on offer in the sector.
The manager says that investors may as well buy passive funds instead of forking out for a supposedly "diversified" portfolio of two or three equity income funds.
"I would be concerned if I was an investor in these funds, because the majority in the sector hold the same stocks," he said.
"Investors should be asking 'why am I paying such high fees for that sort of product when I can get a cheap tracker that can do a better job?'"
"Advisers are telling investors that they are getting more diversity by holding three or so equity income funds, but in reality they are paying for the same fund three times in many cases – it is quite frightening."
A recent FE Trustnet study highlighted "closet tracker funds" in the UK equity sectors.
McClure has managed the £83.9m Unicorn UK Income fund since its launch in May 2004. While it may not be the highest-profile portfolio in the IMA UK Equity Income sector, it has been dominant over the period.
Performance of fund vs sector and index since launch
Source: FE Analytics
According to FE Analytics, it has returned 170.26 per cent since launch, beating its nearest competitor – Invesco Perpetual High Income – by 24.84 percentage points.
It is also number-one in its sector over one, three and five years – again by a considerable margin.
Performance of fund vs sector and index
| Name | 1yr returns (%) | 3yr returns (%) | 5yr returns (%) |
|---|---|---|---|
| Unicorn - UK Income | 29.21 | 86.38 | 110.14 |
| FTSE All Share | 13.21 | 37.96 | 35.79 |
| IMA UK Equity Income |
15.04 | 38.7 | 31.65 |
Source: FE Analytics
According to FE data, the fund has an annualised volatility of 17.34 per cent over five years, compared with 17.09 per cent from the index and 15.86 per cent from the sector.
In the falling market of 2008, the fund lost around 4 percentage points more than its sector, and in 2011 it lost only 2 percentage points more.
Unicorn UK Income holds a mixture of mid and small cap companies, although it can invest across the market cap spectrum. It is a very concentrated portfolio, with just 39 holdings in total.
Diploma, a specialised technical product manufacturer, and Brewin Dolphin, an investment management company, are the fund's two largest holdings. Both are members of the FTSE 250 index.
McClure says GlaxoSmithKline is a "perfect example" of a company that has been over-bought by other IMA UK Equity Income funds. A recent FE Trustnet article showed that 72 out of a possible 99 funds in the sector count GlaxoSmithKline as a top-10 holding.
Unicorn UK Income requires a minimum investment of £2,500 and has a total expense ratio (TER) of 1.59 per cent.