The leading light in the IMA UK Equity Income sector for that multi-cap exposure has tended to be FE Alpha Manager John McClure’s five crown rated Unicorn UK Income fund, which has had a stellar track record.
However, there are many other funds in the sector which have been having success by taking a similar approach.
One is the £463m Standard Life UK Equity Income Unconstrained fund, which has performed well under the stewardship of Thomas Moore, who took over the portfolio in January 2009.
Before making a comparison between the two funds, it must be noted that the last five years or so has been a very good time to be invested in mid and small-caps instead of large-caps as markets have recovered since the period after the financial crash.
Performance of indices over 5yrs
Source: FE Analytics
Therefore, given that Moore took over his fund just a few months before the market bottomed, he has been a major beneficiary of the bull market and industry experts, such as Hargreaves Lansdown’s Mark Dampier, have warned that Moore’s fund, and others like it, haven’t witnessed a full market cycle yet.
Tenure is certainly one aspect that McClure has on his side. His fund is approaching a 10 year track record having been launched in May 2004.
According to FE Analytics, it has been the best performing portfolio in sector over that time with returns of 262.36 per cent and has beaten the FTSE All Share by more than 140 percentage points in the process.
It has also been the best performing portfolio over rolling three and five year periods and the fourth best performer over 12 months.
However, it is clear that the majority of those returns have come after the financial crash. Our data shows that Unicorn UK Income failed to the sector and the index in 2004, 2006, 2007 and 2008, meaning that it underperformed over its first cumulative five year period. Nevertheless, it has rallied strongly since.
Our data shows that Unicorn UK Income was the sector’s best performing portfolio in the rising markets of 2009, 2010 and 2012 and was also top decile in 2013. It did fall further than the sector, however, in the turbulent year of 2011.
It is a very similar story with Moore’s Standard Life fund. It boasts top decile returns in 2009, 2010, 2012 and 2013 and it fell much further than the market in 2011. However, it underperformed against the Unicorn fund in each of those years, both falling one and the rising ones.
Performance of funds since January 2009
Source: FE Analytics
All in all, it means Standard Life UK Equity Income Unconstrained has underperformed against McClure’s fund by 112 percentage points since Moore took over, despite its top decile returns of 177.23 per cent. The small cap rather than mid cap approach of the Unicorn fund will be a contributing factor to this difference.
Moore’s fund has also fallen down in terms of its capital preservation characteristics.
The Standard Life fund has had worse maximum drawdown, downside risk and annualised volatility than the average IMA UK Equity Income fund since Moore took over, though it has had a top quartile Sharpe ratio.
Unicorn UK Income, on the other hand, has been top quartile for all four of those ratios over that period of time.
However, investors purely wanting income would have been better off with Moore’s fund over recent years.
The manager has told FE Trustnet in the past that he will look for a growing level of income, which means he can hold relatively low yielding stocks instead of some of the biggest names in the index.
While investors who bought £1,000 worth of units in each fund would have earned more from the Unicorn fund over five years, Standard Life UK Equity Income Unconstrained comes out on top over one and three years.
Source: FE Analytics
The Standard Life fund’s yield, at 3.36 per cent, is 40 basis points lower than the Unicorn’s fund, however at the current point.
Looking forward, while they are both concentrated funds, there are some major differences between the two portfolios – as shown by the fact that they have completely different top 10 holdings.
Moore’s largest sector weighting is financials, making up 33 per cent of his portfolio, and he holds the likes of HSBC and Legal & General. The Unicorn fund has less than 10 per cent in the sector, however, and none of those names are the big banks or insurers.
While they both look for income outside of the largest members of the FTSE 100, the Unicorn fund has primarily been a small-cap income fund over the years.
Standard Life UK Equity Income Unconstrained, on the other hand, has been more of genuine multi-cap income fund, but still with a heavy bias towards the FTSE 250 and the lower parts of the FTSE 100.
For instance, Moore currently holds 45 per cent in the FTSE 250 and 40 per cent in the FTSE 100. The rest of the portfolio is spread across small-caps, aim stocks and overseas companies.
Despite the fact that McClure has always tended to have a distinct bias towards the FTSE Small Cap and AIM indices, he recently told FE Trustnet that he has been buying FTSE 100 stocks in recent months.
He said the major reason for that was because he wanted liquidity to jump on a number of IPOs and nothing more sinister.
However, some analysts have suggested it could be evidence that the growing size of the portfolio is starting to impact the way in which McClure manages his fund.
Given that the fund has grown from £24m to its current figure of £660m in just three years – and as its AUM has grown five fold over just 12 months – they may have a point.
McClure has defended the size of his fund on number of occasions, but he has also admitted that he can no-longer hold the tiny micro-cap stocks like he has done in the past.
While Standard Life UK Equity Income Unconstrained has also grown substantially over recent years, its AUM is still £436m.
The expert’s view
While Ben Willis, head of research at Whitechurch, rates the both funds, he currently favours the Standard Life fund for those investors who want a genuine multi-cap income fund.
Willis warns that investors who are buying the Unicorn UK Income fund now aren’t necessarily buying the portfolio it was five years ago, while Moore’s fund can afford to grow into a larger vehicle as the manager has always had a decent exposure to the larger end of the market.
“Though I get why they would want to buy IPOs at a later stage and they are right in saying they have better liquidity in large caps, what Unicorn are subtly saying is that they have had a lot of money coming into the fund, which they can’t hold in cash, so they need to be invested,” Willis said.
“It is a practical decision, but you have to realise that they are buying companies now they wouldn’t have even entertained the idea of buying a few years ago.”
“They are both good at what they do, but I would go for Moore’s fund as it has more flexibility. He has been buying more large caps recently, but that is because he sees value there, instead of just being forced to buy them.”
Despite that, the clean share class on the Standard Life fund has an ongoing charges figure (OCF) of 1.15 per cent, which is 30 basis points more than the Unicorn fund.