Traditionally, growth stocks have been preferred in times of economic expansion, with equity income stocks often criticised for prioritising dividends over innovation and investment. However, McClure (pictured) thinks that his portfolio is full of companies that are not only financially secure, but also enterprising enough to outgrow the wider market.
"There’s a conception that if you’re looking for growth, small and mid cap companies which yield nothing will make you all the money in the world. That is rubbish," he said.
"If you’re a good business, you should be able to pay a dividend and be able to fund your own growth."
McClure points out that over the long-term, high-yielding companies have performed much better than those without a dividend.
"Recent research from Numis has shown that from 1955 to 2012, the highest yielders – defined as the top 30 per cent – in the Numis smaller companies index have an annualised return of 18.4 per cent while the lowest yielders – defined as the bottom 30 per cent – returned just 9.1 per cent," he said.
The compounding effect of income has undoubtedly contributed to this result, but McClure says that these stocks would not have been able to achieve this margin of outperformance without good growth levels.
His five crown-rated Unicorn UK Income fund has consistently been the best performer in the UK Equity Income sector recently, topping the tables over a cumulative one, three and five years.
Source: FE Analytics
As well as being the standout performer in terms of total return, Unicorn UK Income has operated with around the same volatility as its sector average and benchmark, in spite of its bias towards small caps.
Our data shows that over a five-year period, Unicorn UK Income has an annualised volatility of 13.66 per cent, compared with 14.44 per cent from the All Share and 12.99 per cent from the UK Equity Income sector average.
McClure’s fund has a lower max drawdown than both over the period.
Risk/return of funds, sector and index over 5yrs
Source: FE Analytics
It is currently yielding 3 per cent.
While income has been a major contributor to performance, McClure still leads the way when looking at capital growth. Our data shows that even with the compounding impact of dividends stripped out, Unicorn UK Income still consistently comes out on top.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
UK equity markets have performed strongly in general over the last five years or so, but the UK economy has been relatively weak – something that McClure says bodes well for his fund, as small caps tend to do better in positive economic environments.
The manager is bullish on the recovery and has increased his weighting to cyclicals in recent weeks, including three brand new holdings.
Conviviality Retail
Conviviality Retail owns a chain of off-licences in the north west, which operate under the name of Bargain Booze.
The £108m company is not currently yielding anything as it entered the market only two months ago, but McClure is confident it will be able to generate a healthy dividend in the future.
"We supported the company at IPO a few months ago and it has done very well," he said. "We have seen an uptick in IPO activity in recent months and this is a positive for us."
Performance of stock since July 2013
Source: FE Analytics
"The chief executive is ex-Waitrose and ex-Sainsbury’s and knows a huge amount about the market. They operate a franchising programme and recently bought a London chain of wine stores called Wine Rack, which isn’t currently franchised, but will be."
McClure is not the only high-profile small cap manager who is backing the Crewe-based company: Gervais Williams currently counts it as a top-10 holding in his CF Miton Multi Cap Income fund.
John Menzies
"John Menzies is well known for its newspaper distribution division; however, we’re really interested in the aviation side of the business, which generates an increasing proportion of the company’s profits," said McClure.
"The ability to turn round an aircraft in a quick, safe and efficient manner is a crucial role for budget airlines in particular and this is exactly where Menzies Aviation comes in, handling over 1 million flights and 77 million passengers a year. The division has a growing geographic footprint, serving over 500 customers in 30 countries worldwide," he added.
According to Bloomberg, the £467m company is currently yielding 3.7 per cent. It is a constituent of the FTSE 250.
John Menzies had a disastrous 2007 and 2008 but has since recovered very strongly, returning almost 90 per cent over the past three years. However, McClure thinks it has much more room to expand.
No IMA funds currently hold the stock in their top-10.
UK Mail
McClure has a major holding in FTSE Small Cap constituent UK Mail – the national parcel and mail delivery business. The manager says the company has benefited from the explosive growth in online retail sales and will continue to do so.
"With more and more transactions taking place online, parcel volumes in the UK have increased dramatically," he said.
"The company has an extensive national distribution network and generates sufficient levels of cash to both pay a healthy dividend and fund future investments in automation and increasing the network capacity."
UK Mail is currently yielding 3.58 per cent and has a market cap of £331m. Williams' Miton UK Multi Cap Income fund also holds the stock, as does the highly rated Liontrust UK Smaller Companies.
The company’s share price has nearly doubled in the last year or so, after a disappointing 2010, 2011 and 2012.
