McClure (pictured) has taken his large cap exposure up to 8 per cent in recent months, disappointing some investors used to his small to mid-cap bias. However, he insists that his motivation is totally investment led, pointing out that the move will allow him to take advantage of compelling opportunities in the IPO market later this year. The manager says he has been buying IPOs in the largest volumes of the fund’s history in recent years, including the likes of DX Group and Conviviality; however, he thinks there are much more on the horizon, and is putting himself in a position to snap them up.
“We have bought a few FTSE stocks, in the knowledge that they pay out their dividends at different parts of the year,” explained McClure in an exclusive interview with FE Trustnet.
“We’ve done this because we know what the IPO pipeline looks like, and there are a number of companies we’re interested in.”
“There’s an 8 per cent exposure, but the money is only parked there. We will be using that money to buy into IPOs later on in the year, but for the time being we need to hit that IMA yield target [of 110 per cent of the FTSE All Share.] To do that, we can’t hold cash – we need companies that pay us a yield.”
McClure says he has been left frustrated by the yield compression among small and mid-caps, which has to some extent forced him into large cap names for the time being.
“We’ve had to slightly adjust what we do, and our rivals – i.e. Chelverton [UK Equity Income], Marlborough [Multi Cap Income], Miton [UK Multi Cap Income] and Standard Life UK Equity Income Unconstrained – have the same problem,” he said.
“If you take something like VP Group, its share price has doubled but its dividend is only up 11 per cent. Management are very pleased with this, but its yield has come down because of the growth. This is very typical.”
Performance of stocks and indices over 3yrs
Source: FE Analytics
“We could have gone up the yield curve, but we’d have to hold [worse] companies. There’s no chance of us doing that. We prefer the way we’re doing it.”
Equipment rental specialist VP Group, textile maintenance company Berendsen and packaging business RPC Group have all been major holdings in Unicorn UK Income in recent years. The strong performance of all three has seen yields fall below 3 per cent in all cases.
McClure has recently sold down his position in VP, which is no longer a top-10 holding.
He expects both valuations and yields in upcoming IPOs to be very attractive, pointing to Conviviality’s starting yield of 7 per cent when he bought it last summer. For that reason, he says he is more relaxed about hitting the 110 per cent yield target later on in the year.
The manager was unwilling to highlight the companies he is looking to snap up when they float for legal reasons, but says they will include “the next generation of investment names.” McClure believes the depth of quality in the IPO pipeline will be one of the biggest drivers of the next phase of the UK equity bull market.
Unicorn UK Income includes FTSE 100 companies Scottish & Southern, AstraZenca and Centrica in his portfolio. He bought the last of these for the first time only a matter of days ago.
A handful of UK Equity Income funds have had to move into the IMA UK All Companies due to concerns over their ability to meet the sector’s yield target. Notable examples include James Henderson’s Henderson UK Equity Income & Growth fund and more recently Mark Barnett’s £13.4bn Invesco Perpetual High Income fund.
McClure says he and co-managers Simon Moon and Fraser Mackersie have worked very hard to put a portfolio of stocks together that will enable them to hit the dividend target this year. Unicorn UK Income is currently yielding 3.75 per cent, which is a touch above average for the IMA UK Equity Income sector.
Rob Gleeson, head of FE Research, thinks there is plenty of logic in McClure’s arguments, but thinks the issues of fund size and the difficulty of hitting yield targets are a cause for some concern.
“He’s been very upfront in his reasons, and the point on IPOs does make sense,” he said. “If you’re interesting in an upcoming IPO but don’t know when it’s coming, it makes sense to still get a yield from a large stock that you can easily sell out of.”
“That said, he has had to change his style which we are always wary of. On the issue of yield, some managers have moved from the UK Equity Income sector into IMA UK All Companies in order to keep their process the same.”
“The manager has bought into IPOs before and not had to park his cash in large caps, and so I think the size of the fund is relevant here. It’s one we’ll be keeping an eye on.”
While not ruling it out altogether, McClure says he is keen to stay in the UK Equity Income sector.
On the issue of fund size, McClure says Unicorn has pulled back from marketing the Unicorn UK Income fund, which in most cases usually precedes a more official soft-closure.
“We don’t want to get into the same situation as Harry Nimmo’s [Standard Life UK Smaller Companies] fund, which had to close and re-open,” he said.
“It may get to the point when we introduce an entry charge, but that wouldn’t affect people in the fund already who wanted to renew.”
Performance of fund vs sector and index since launch
Source: FE Analytics
Unicorn UK Income is the best performing fund in its sector since its launch in 2004, and over a five year period. It’s also top decile over a one and three year period.
The fund has seen a meteoric rise in assets in recent years, growing from just £85m in January 2013 to £650m at time of writing.
It has clean share class ongoing charges of 0.81 per cent.
