McClure (pictured) has run the five crown-rated Unicorn UK Income fund for almost a decade, but has only started to gain attention from mainstream investors recently.
FE Trustnet first brought the fund to investors’ attention back in early 2011, when assets under management stood at only £5m. At the time of writing, the figure has swollen to £178m.
The manager says the high-profile launches of a number of similar vehicles have helped his cause and that he expects more to follow in the future.
"We’ve been doing this for almost 10 years now. I think people thought we were bonkers doing it for all this time, but now they are starting to understand it finally," he said.
"We had Chelverton come in, who have been in the space for a long time, and more recently Marlborough and Miton."
"Most importantly, I think, you’ve got Standard Life playing this story, with the UK Equity Income Unconstrained fund."
"I think this is the biggest accolade yet. When a group as big as Standard Life is running a strategy like this, it’s clearly catching on."
David Taylor and David Horner’s PFS Chelverton UK Equity Income fund was launched in December 2006, while the Standard Life fund was launched a year later, in 2007. However, manager Thomas Moore, who changed the focus of the portfolio, was only appointed in 2009.
Giles Hargreave’s Marlborough Multi Cap Income fund and Gervais Williams' Miton Multi Cap Income fund were both launched in 2011.
All have very good records in recent years: the Unicorn and Chelverton funds both have five FE Crowns, while the Standard Life one has four.
Neither of the other two have achieved a three-year track record yet, but are both well ahead of the UK Equity Income sector average since launch.
McClure’s fund is invested predominantly in small and mid caps. He says there are various misconceptions surrounding income funds that focus on this area – namely, that they underperform their growth-focused rivals.
"There’s been some very interesting research from Numis recently that split the [Numis] smaller companies index into high yielders, low yielders and no yielders," he said.
"Since 1956, the highest yielders [defined as the top 30 per cent] have an annualised return of 18.9 per cent, the lowest yielders [defined as the bottom 30 per cent] have an annualised return of 13.8 per cent, while the non-dividend payers have returned just 9.3 per cent."
"There’s a conception that if you’re in small caps, you want the growth stocks that yield nothing, which will make you all the money in the world. That’s rubbish."
"If you’re a good business, you should be able to pay a dividend and be able to fund your own growth."
The performance of McClure’s fund seems to vindicate this view, to a certain extent. Unicorn UK Income tops the UK Equity Income sector over three and five years, with returns of 87.29 and 161.41 per cent, respectively; however, if it sat in the UK Smaller Companies sector, it would be second only to the Fidelity UK Smaller Companies fund over five years and a top-10 performer over a three-year period as well.
Performance of fund vs sectors over 5yrs
Source: FE Analytics
As the graph above shows, Unicorn UK Income has held up very well against the IMA UK Smaller Companies sector average.
Another myth that McClure is keen to shoot down is that small caps are automatically more volatile than their large cap rivals.
"The market has started to rally again and inevitably we won’t go up as fast as the market because we don’t buy into ultra-volatile stocks," he explained.
Our data shows that the Unicorn UK Income fund actually held up much better than the FTSE All Share and the IMA UK Equity Income sector average during the sell-off in May and June.
Performance of fund vs sector and index in 2013
Source: FE Analytics
The fund has been less volatile than both measures over the short- and medium-term. According to FE Analytics, McClure’s portfolio has an annualised volatility of 10.96 per cent over three years, compared with 12.55 per cent from the All Share and 11.32 per cent from the UK Equity Income sector average.
McClure has used the recent inflows to put a new tilt on his portfolio, so that he can benefit from cheaper valuations across the market.
A number of high-profile experts have recently voiced concerns about the lack of value in equity income, but McClure says that his larger investable universe and expertise in looking further down the market cap scale have allowed him to find more attractively valued stocks.
"I’ve used the cash-flow to reshape the fund slightly," he explained. "We’ve been overweight international engineers for a fair while, which has worked out very well for us."
"We haven’t sold out of them, but we’ve put the money to work elsewhere, so the weightings have come down."
He has focused on the UK domestic market, for example, which has been out of favour for some time.
"I’ve bought into the car dealerships, adding both Pendragon and Lucas," he said. "Investors have been wildly negative about the high street and UK consumer, but when a car brakes down, you need to trade it in and buy a new one – that’s not something you stop doing."
"Most people don’t have the time to sell a car themselves, so these businesses have a good market."
"We’ve also added Cineworld, which is now our biggest holding. Any business that can charge £7.50 for popcorn and get away with it is a good business in my eyes."
"You might think people aren’t going to the cinema because of the UK economy, but this isn’t the case. Instead of going on your third or fourth holiday, people are going to the cinema instead."
Cineworld currently has a 5.1 per cent weighting in the Unicorn UK Income fund, making it McClure's biggest holding by some distance. It is currently yielding 3.5 per cent. Moore’s Standard Life UK Equity Income Unconstrained fund also holds the company in its top-10.
Pendragon has a 2.2 per cent weighting in the fund, while Lucas has a 3.3 per cent weighting.
McClure is relatively optimistic about the outlook for equities, but pinpoints two major threats to markets.
"First of all, southern Europe is still a worry," he said. "I don’t think we’ve had all the toxic stuff come out of there yet. I’m sure Germany will sort things out eventually, but it’s still a risk."
"The second big risk is geopolitical – in other words, North Korea suddenly launching a missile at the US or Syria doing something daft to Israel. This would be bad for markets initially, though these kind of things will actually be more positive for equity markets eventually."
"Times of war tend to bump up consumption and technological breakthroughs tend to occur because there is more of a need for them. Remember the jet engine was designed during the Second World War."
Looking more closely at the UK, McClure identifies the risk of interest rates going up as one of the biggest headwinds on the horizon. The FE Alpha Manager believes the move could come as early as next year.
This, he says, is why he does not hold housebuilders.
"Not having any exposure to this sector hurt us last year – no doubt about it – but I’m terrified about interest rates going up, which I think will hit them hard."
Unicorn UK Income is available for a minimum investment of £2,500 and has ongoing charges of 1.59 per cent.
