McClure, who died in June, had developed a large investor following on his Unicorn UK Income fund, as he was one of the first to successfully implement a genuine small and mid-cap approach to the UK dividend paying market.
He launched the fund in May 2004 and, according to FE Analytics, it was the best performing portfolio in the IMA UK Equity Income over his tenure with returns of 266.59 per cent, beating its FTSE All Share benchmark by close to 130 percentage points.
Performance of fund vs sector and index May 2004 to Jun 2014
Source: FE Analytics
Following the news of his death, Unicorn announced that Simon Moon, manager of its UK Smaller Companies fund, and Fraser Mackersie, who runs the UK Growth portfolio, would be co-managers on the fund.
Both became co-managers with McClure on Unicorn UK Income last year but had worked closely with him on the portfolio for six years. Although they admit it will be a challenge, the managers say investors can expect the fund’s approach to remain unchanged.
“Personally, it has been very sad for the both of us to lose him.
“We both worked with him every day for six years and he was quite a character so it is a sad loss personally and professionally,” Mackersie said.
Moon added: “I’d say we were lucky to join Unicorn at a time in our careers which was very formative for each of us. 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.”
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 were 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.
He would also only ever invest in companies where he had a clear understanding of their business models.
While the managers have stuck to that strategy, it has been a difficult few months for Mackersie and Moon as not only have they lost one of their colleagues, but it has been a period where small and mid-caps have underperformed against FTSE 100 companies.
The redemptions following McClure’s death, combined with rotation out of smaller companies, has meant the Unicorn UK Income has been the sector’s second worst performing portfolio and has underperformed against the index since June with losses of more than 4 per cent.
Performance of fund vs sector and index since June 2014
Source: FE Analytics
“It’s worth saying that we did experience some redemptions following John’s death, but they weren’t as significant as we first thought there could have been,” Mackersie said.
“It was unchartered territory for all of us, and hopefully we won’t have to go through anything like that again, but Simon and I went in front of a lot of investors and we have been encouraged by the response.”
Though the portfolio has underperformed and around 4.5 per cent of its assets were redeemed, the managers are confident that they can replicate the fund’s long-term performance in the future.
“There has been some largely indiscriminate rotation from small and mid to large caps. The companies that really enjoyed the re-rating rally we had seen over the past couple of years were the hardest hit,” Moon said.
“They tended to be quality companies which we held, so the rotation has created a number of opportunities to look at very high quality stocks again.”
Simon Evan-Cook, senior investment manager at Premier, understands why investors may be concerned about the future of the Unicorn UK Income fund, but he says Mackersie and Moon are very good replacements.“We are not holders of the fund, but I went into see the two managers a few weeks and I was impressed,” Evan-Cook (pictured) said.
“The calibre of managers at Unicorn is high and they have been successful in bringing in new talent. Mackersie and Moon have been well indoctrinated into the John McClure way and so if I were an investor in the fund, I would be very reassured.”
He added: “They are top quality managers and it is a fund that we will continue to monitor.”
While Moon and Mackersie have worked in the industry for a long time, their track records as managers are still relatively short.
Nevertheless, Unicorn UK Growth has been a top decile performer in the IMA UK All Companies sector since Mackersie took over in March 2011.
It has returned 60.06 per cent over that time, which is nearly double the gain of the FTSE All Share.
Performance of fund vs sector and index since Mar 2011
Source: FE Analytics
Moon took over the Unicorn UK Smaller Companies fund in April last year.
It has been the fourth best performing portfolio in the IMA UK Smaller Companies sector since then with returns of 37.95 per cent.
While McClure had become very popular with investors, some experts had started to voice their concerns about the size of the fund.
Our data shows its AUM had stood at just £37m this time three years ago, but is currently weighing in at £632m; peaking at £710m in June prior to the redemptions.
McClure had defended the size of his fund, though he admitted he was no longer able to buy some sub £15m market cap companies like he had done in the past. He also started to worry investors when began buying up FTSE 100 names.
Some saw this as a sign that the fund had become too big, but Moon and Mackersie reiterate that the weighting to large-caps – which had been 15 per cent earlier in the year – was a temporary measure so that they could gain quick access to liquidity in order to jump on IPOs.
The weighting also helped them hit their yield target.
The managers have already reduced that figure to 4 per cent and they expect it to continue to fall. They also say they have no problems regarding size at the moment.
“We do get asked a lot about capacity, although probably less so in the last three or four months, as you can imagine,” Mackersie said.
“However, we don’t ever want to own more than 5 per cent of the equity of any one business and the average market cap, ex FTSE 100 stocks, is around £580m and we won’t take the number of holdings above 50.”
“That gives you a very theoretical top-end figure for this strategy which is north of £1.2bn. We are £630m at the moment, so we are way off that target but it something we are very much mindful of.”
Unicorn UK Income has a yield of 3.9 per cent and an ongoing charges figure (OCF) of 0.81 per cent.
