Both funds, which focus on the small cap part of the market, have seen significant inflows in recent weeks. The Unicorn fund however has taken well over double the amount of cash of its Chelverton counterpart, despite the fact the latter yields 4 per cent and Unicorn UK Income just 2.9 per cent. Investors would have received a higher income from PFS Chelverton UK Equity Income than Unicorn UK Income over three and five years, according to data from FE Analytics.
Willis says that some of the investors who have charged into Unicorn UK Income without looking may regret their haste.
“It’s horses for courses, really,” he said. “If you are seeking income you may prefer that high dividend approach or you may decide to go for the total return approach [of Unicorn].”
Data from FE Analytics shows that if you had put £10,000 into each of the two funds five years ago, you would have generated £741 more in income from the Chelverton portfolio.
Income earned over 5yrs
Source: FE Analytics
On a total return basis, which includes capital growth and reinvested income, the Unicorn fund would have returned more, however, having gained 272.5 per cent in that time to the Chelverton fund’s 224.67 per cent.
Performance of funds vs sector and index over 5yrs
Source: FE Analytics
Over three years the same pattern is repeated. Investors with the income-paying shares would have £283.97 more in their pocket from an initial £10,000 investment, while the total return for the Unicorn fund would have been higher: 77.95 per cent to 70.01 per cent.
Unicorn UK Income, which has five FE Crowns and is a member of the FE Select 100, has attracted huge inflows over the past year, with the decision of Neil Woodford to leave Invesco Perpetual giving it a huge knock-on boost.
Our data shows that over the last six months the £462m fund has more than doubled in size, taking in £240m in net inflows, the third-largest figure over that timeframe.
Over the same period the Chelverton fund has attracted just over £100m, and grown to £209m in size, meaning it has been very much a second choice for investors looking at small and mid cap income funds.
While the total return on the Unicorn fund is outstanding – it has the best figures over three and five years of any fund in the IMA UK Equity Income sector – the Chelverton fund is second over both periods.
For this reason it is a genuine alternative to John McClure’s portfolio, and one that may better suit investors looking for income rather than the compounding and defensive effects of dividends.
Willis says he fears that many of the investors who have chosen the Unicorn fund may not be aware of its relatively poor income record.
“Unicorn has gained traction because people have looked at what has performed well over the last few years and there has been a bit of blind buying,” he said.
Willis adds that FE Alpha Manager McClure is less concerned with finding high-yielding stocks than with finding secure companies with growth potential. For this reason he has been led into sectors and stocks with a lower yield.
By contrast, the managers of the Chelverton fund screen for income, and only put stocks in their portfolio that have a prospective 4 per cent dividend yield.
Unicorn’s approach won’t suit all investors, the analyst warns.
“Unicorn is more about looking for 'quality' stocks, they are not going to look at yield so much,” he said. “They are looking for the potential for growth over the medium-term.”
The threshold for the sector is 110 per cent of that of the FTSE All Share. While rising equity prices have compressed the yield on the index to 3.51 per cent, Unicorn UK Income is currently well under the limit.
Funds that fail to pay out this level of income for a sustained period of time are booted out of the sector, as happened to FE Alpha Manager James Henderson’s Henderson UK Equity Income fund.
However, Willis explains that the IMA gives a good deal of leeway to funds on this measure. He points out that sometimes funds have good reason to be under the limit for a certain period of time, whether it be caution over valuations or the desire to build up cash for better opportunities.
PFS Chelverton UK Equity Income has won five FE Crowns thanks to its outstanding track record over the last five years, although Willis points out that it had a rocky start.
Managers David Horner and David Taylor launched the fund in 2006 with an exclusively small cap remit.
The next two years were terrible for the fund, which was 67th out of 67 funds in 2007 and 66th out of 70 in 2008.
Being in small caps hurt the fund in that environment, which is why the managers took the decision to widen its remit to include mid caps too. The fund currently has 32 per cent in companies at least £1bn in size.
However, while investing in small caps hurt both funds, McClure’s portfolio suffered less: his fund lost 32.76 per cent in 2008 rather than the 43.68 per cent of the Chelverton fund, and in 2011, the most recent bear year for the market, it produced third-quartile figures to the Chelverton fund’s fourth-quartile numbers.
This suggests that the Unicorn fund’s focus on “quality” has helped it to perform better in down-markets.
A number of managers have suggested that high-yielding areas of the market are increasingly made up of weaker companies more disposed to greater share price falls as quality dividend-payers become a crowded trade.
James Henderson is one manager to have deliberately sought out lower-yielding parts of the market, saying that delivering a higher yield involves taking on more risk than he finds acceptable.
Investors looking for a small and mid cap income fund have to decide where they stand on this issue when choosing between the two portfolios.
PFS Chelverton UK Equity Income is an 89-stock portfolio with a maximum stock position of 1.83 per cent, in mid cap telephone company TalkTalk.
The fund requires a minimum initial investment of £1,000 and has ongoing charges of 1.84 per cent. The charges on the Unicorn fund are 1.57 per cent.
