It was launched by star manager John McClure in May 2004, over which time it has been the best performing portfolio in the highly popular IMA UK Equity Income sector with returns of 245.37 per cent, beating its benchmark by more than 100 percentage points in the process.
Performance of fund vs sector and index since May 2004
Source: FE Analytics
However, readers will no doubt be more interested in the recent drop-off in performance – which is the clearly displayed on the graph above – and it goes without saying that it has been a very difficult year for the fund.
Firstly, FE Trustnet was very sad to report that McClure passed away earlier in the summer.
The £568m portfolio is now headed up by Fraser Mackersie and Simon Moon, who both run other UK focused equity funds at Unicorn and were named co-managers with McClure in January this year.
Secondly, McClure’s death coincided with a quite sharp market rotation out of smaller companies into large-caps and, combined with the redemptions Mackersie and Moon had to deal with, meant the fund has been the second worst performer in the sector this year with losses of 2 per cent, underperforming its benchmark by around 4 percentage points.
Performance of fund vs sector and index in 2014
Source: FE Analytics
Its AUM has fallen by around £200m since its peak earlier this year, according to FE Analytics.
Investors have understandably been cautious on the fund over recent months as not only is the outlook for small and mid-caps uncertain with further volatility expected next year, but with McClure no longer at the helm, will it be the same fund that used to dominate the sector?
Mackersie and Moon certainly say it is, pointing to the fact that Unicorn has very much a team-orientated approach to running money and that they had worked closely with McClure for more than six years and are therefore “indoctrinated” in his style.
“We both joined when we were very technically able, I would say, but we didn’t have a set-in-stone investment process. John, as a founder of Unicorn, really had worked very hard to put a process in place that we have been fully indoctrinated into and we fully follow,” Moon told FE Trustnet in September.
McClure’s approach was based on bottom-up stock selection with a clear bias towards mid and small-caps.
It is high conviction with low turnover and companies that fit his criteria are those that were profitable at the time of investment, had strong balance sheets, significant market share – usually in a relatively niche industries – a strong management team and were paying a dividend.
Nevertheless, though the style might still be in place, now the very successful “trigger-puller” is gone, what should investors be doing with the fund?
Peter Holman, chief investment officer and head of asset allocation at Investment Quorum, is in the ‘hold’ camp.
He originally started buying the fund four years ago following a meeting with McClure and liked his investment approach and the fact that, like other boutique managers, he had “a lot of skin in the game”.
He admits that he did place the fund under review immediately after McClure’s death, but having met with Moon and Mackerise a few months ago he is happy to keep it in his portfolios.
“I think people look at the performance and are putting two and two together and getting five,” Holman said.
“Yes, the new managers have come under pressure and they have had to weather some redemptions, but I think they are doing an OK job. The investment process is unchanged and they have been well-tutored in McClure’s approach.”
“We do have some small positions in the fund and it isn’t one we are adding to our sell list but we are just watching to see how they get on. We have no concerns about their stock-picking abilities but obviously, the UK market has not been helpful recently as we have hit a bit of a headwind.”
Its recent underperformance has meant the fund now offers an attractive yield of 5.31 per cent.
Mike Deverell, investment manager at Equilibrium and member of the AFI panel, sees the fund as a ‘sell’, on the other hand, though his decision has nothing to do with new managers.
Deverell is a firm believer that funds should play a certain role within a portfolio and while he rates the fund, he doesn’t think it is the best fund for income stability and he therefore has no place for the it.
“Generally, Unicorn UK Income is more concentrated than other multi-cap income funds and therefore has been more volatile,” Deverell (pictured) said. “The question is, what do you want from your income fund? Well, you want income of course, but you also want it to not be too volatile. Its drawdown can be quite big and so it is a fold for me.”
He added: “They are good fund managers and it has a good yield and offers decent growth potential, so if that’s what you are looking for then that’s fine. But we are not.”
Instead of using Unicorn UK Income, Deverell uses Gervais Williams and Martin Turner’s CF Miton UK Multi Cap Income fund which recently re-opened its doors to new investors following a brief soft-closure last year.
The £350m fund has 130 holdings compared to Unicorn’s 49 holdings and Williams and Turner tend to invest in micro-caps more than Moon and Mackersie.
It was launched in October 2011 and it has slightly outperformed the Unicorn fund from a total return point of view with its top decile returns, though that outperformance has mainly come about this year.
Performance of funds vs sector and index since Oct 2011
Source: FE Analytics
It has had a lower maximum drawdown, which measures the most an investor would have lost if they bought and sold at the worst possible times, than the Unicorn fund since its launch.
The fund has paid out slightly less in terms of income over that time, but our data doesn’t include CF Miton’s December dividend date.
It has a lower yield at 3.38 per cent.
CF Miton UK Multi Cap Income has an ongoing charges figure of 0.83 per cent, while Unicorn UK Income’s is slightly lower at 0.81 per cent.
