McClure’s fund has grown from £83m to £520m over the past 12 months, propelled by strong performance figures and huge outflows from Neil Woodford’s income funds. The manager says that he and the Unicorn team have been positioning their portfolios for strong UK domestic growth and are likely to maintain this focus for the coming year.
“Over the past 18 months we have been anticipating both improving UK growth and a stronger sterling exchange rate,” he said.
“Hence, we have focused more on what were relatively depressed valuations for UK economy-sensitive shares.”
“There may well be some mileage left here. UK real economic growth will have averaged 0.4 per cent per annum over the last seven years including both the strong years of 2007 (3.4 per cent) and 2013 (assumed at 2 per cent).”
“Consequently, we believe many investors are yet to adjust 2014 and 2015 profit forecasts sufficiently for growth rates which may be unimaginable to some.”
Unicorn Income is the top-performing fund in the IMA UK Equity Income sector over three and five years.
The fund has returned 294.18 per cent over the longer time period while the average fund has made 109.79 per cent, according to data from FE Analytics.
This outperformance has been powered by the fund’s focus on smaller companies: over that time the FTSE Small Cap index has made 231.06 per cent.
The fund’s performance figures would put it within the first quartile of the IMA Smaller Companies sector.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund’s rapid growth has caused concerns among some investors that it may have to close in the near future to retain its small cap style. McClure addressed these concerns in a recent FE Trustnet article.
He was joined on the management team of the fund this week by Fraser Mackersie and Simon Moon.
Mackersie already runs the £23m Unicorn Free Spirit fund, an unconstrained fund with a high focus on technology companies. Moon runs Unicorn’s £49m Smaller Companies fund.
The team says it is confident that the domestic recovery in the UK is sustainable in the short run.
“We see no reason why the UK economy should not build on the 2013 recovery in 2014, with consensus growth forecasts now around 2.5 per cent seeming realistic,” McClure said.
“Consumer spending, investment and even exports should be moving higher.”
McClure says that he also expects dividend growth in the high single figures over the next year.
With the yield on the FTSE All Share already superior to that of 10-year government bonds, this should also be a driver of appetite for equities, the manager says.
“Finally, there must be some chance that pension fund trustees will force actuaries to revise their assumptions if pension fund deficits show little benefit from the improved returns being generated from equities,” he added.
“This would clearly make a significant difference to the demand for good quality shares.”
However, the Unicorn managers say that in the medium-term, they expect to revert to a policy of favouring businesses that export.
They have concerns that the UK’s current account deficit remains unaddressed and could be material in the country’s high debt levels weighing on markets in the years to come.
“Despite the government’s pledge in 2010 to rebalance the UK towards a better export /import balance, policy has for some time now been aimed more towards a recovery in domestic economic activity and consumption with a view to the 2015 general election timetable.”
“This is partly excusable as the downturn in Europe prevented export growth.”
“Consequently, there has been no rebalancing in this direction. Note that the UK third-quarter current account deficit at £20.7bn equated to 5.1 per cent of GDP.”
“Hopefully, the third quarter import figure included a large increase in raw materials and semi-manufactured goods ahead of a major expansion in exports.”
“Secondly, there has been no relative decline in public sector pay versus the private sector; indeed there is some evidence that public sector pay growth has moved further ahead since 2010.”
“This makes the current upturn potentially risky for private sector wage inflation at levels higher than unskilled grades in many areas.”
“This has also led to a relatively high rate of public sector inflation since 2010 despite the spending ‘cuts’.”
“The still high public sector net borrowing requirement now forecast at £111bn for 2013/14 will be just £4bn below 2012/13 levels, and at 6.6 per cent of GDP partly reflects this unfortunate relative price effect.”
“With welfare payments (including pensions) still climbing, the scope for economic growth to materially reduce the figure is less than generally expected.”
“Instead the Office for Budget Responsibility is relying on government spending curbs to keep expenditure growth below the nominal growth in GDP (expected to average 4.5 per cent over the next several years) for any reduction in the PSNBR.”
“Meanwhile net government debt is forecast at £1,269bn or 75.5 per cent of GDP for April 2014, up from £1,185bn in April 2013.”
“Both the PSNBR and government debt percentages are potentially dangerous for financial markets if the economy proves less robust.”
Consequently, the managers expect to rebalance Unicorn UK Income towards companies with revenue streams derived from abroad.
“Looking further out, we think it likely we will revert to our more typical stance with a strong preference for companies which can help the UK pay its way in an increasingly global economy,” McClure said.
“Judged on our views expressed here for the UK economy itself, this will be no surprise to our investors.”
“However, in the short-run we think the stock market has not adjusted sufficiently for exchange rate factors where sterling’s strength is still putting pressure on profit margins and profit translation.”
“Additionally, many of the best UK international businesses are involved in capital goods or at least later-cycle orientated growth.”
“There could well be some excellent investment opportunities in these areas if shares fall back on short-term disappointment.”
“This opportunity would be magnified if political risk ahead of the general election in 2015 or a relatively slower UK growth rate compared with more advantageously placed economies were to cause sterling weakness.”
Unicorn Income requires a minimum initial investment of £2,500 and has ongoing charges of 1.57 per cent. It has five FE Crowns and is a member of the FE Select 100.
