A correction in small and mid-caps at the beginning of the year has seen discounts widen across a number of specialist investment trusts – especially those that have led the rally of recent years.
Acorn Income IT is certainly one of those, and the sudden death of co-manager John McClure has led to further selling. After having been on a premium of 4.64 per cent earlier this year, it’s now on a discount of 8 per cent. On average, the trust has traded at around par over the last year.
The trust has returned more than any other in the entire AIC universe from both a share price and net asset value (NAV) point of view over the past five years, and while the death of McClure is a big blow to the trust, Lovett-Turner is confident his replacements will do a good job.
“Naturally [McClure’s death] raises the question of whether the historic performance record is still relevant. Following a recent meeting with Simon Moon and Fraser Mackersie, co-managers of the smaller companies portfolio, we remain of the view that the fund can continue to deliver a similar risk/return profile,” he said.
“We believe that Moon and Mackersie are well placed to continue the strong performance record the fund by utilising the same investment process.”
Performance of trust, sector and indices over 5yrs
Source: FE Analytics
“The uncertainty over the change in manager and a sell-off in small caps have led to a widening of the discount to 8 per cent. We believe this offers attractive value and there may be potential for a rerating if the managers can deliver attractive returns.”
As well as deliver stellar returns over five years, Acorn Income IT is among the 15 best-performing closed-ended funds over a three and 10 year period, with returns of 92.35 and 369.42 per cent, respectively.
However, the closing of the discount and the sell-off in small and mid-caps has seen the trust fall well behind its peer group in recent months.
McClure passed away in early June.
Performance of trust, sector and indices in 2014
Source: FE Analytics
Acorn Income IT previously sat in the IT UK Equity Income sector, but has recently moved to IT UK Equity & Bond.
It tends to hold the bulk of its portfolio in small caps, taking the Numis Smaller Companies index as its benchmark as a result; however, Paul Smith is responsible for a fixed interest segment, which currently makes up around 20 per cent of assets.
Numis says it’s a big plus that Smith will stay on the Acorn team, which he joined in 2007.
Moon and Mackersie have been at Unicorn since 2008. Mackersie has run the Unicorn UK Growth fund since March 2011, while Moon has headed up Unicorn UK Smaller Companies since late 2013.
Both are top quartile performer in their respective sector over one, three and five years.
Performance of funds and sectors over 3yrs
Source: FE Analytics
Both managers were appointed as co-managers on the flagship Unicorn UK Income fund and the Acorn Income IT prior to McClure’s death in December 2013.
While losing McClure’s excellent stockpicking skills is of course a big blow to the trust, Lovett-Turner is encouraged that the managers have been groomed as successes for a number of years now.
He thinks investors should expect a similar risk/return profile in the coming years as a result.
“We believe Acorn Income’s strong performance record reflects a combination of the investment approach and the structure,” he said.
“The trust has gearing of around 50 per cent for the ordinary shares through ZDPs [zero dividend preference shares], which has boosted performance in rising markets and helps to enhance the yield, currently 3.8 per cent.”
“There is inevitably a risk that performance may suffer in an equity market correction. However, the trust has historically delivered lower NAV volatility than many of its peers due to a combination of the defensive bias of the equity portfolio and an allocation of 20-30 per cent to a fixed income portfolio managed by Smith.”
Lovett-Turner added: “Unicorn operates a team-based, well-defined bottom-up investment approach. The portfolio will continue to be run in the same style, focused on profitable companies with strong positions in niche markets that have experienced management and a record of good cash generation and dividend growth.”
“Manager meetings are a crucial element of the process, and the aim is to run a concentrated portfolio of stocks with low turnover: Acorn’s Smaller Companies portfolio currently has 37 holdings.”
Jason Hollands of Bestinvest is also supportive of the new lead managers, and continues to rate Unicorn UK Income as a result. “McClure was of course a big part of the team, but it’s always been a team approach over there,” he said.
“Acorn Income IT wasn’t on our buy-list, but Unicorn UK Income was. We’ve put it onto a three star buy rating from four stars, which is still a very positive rating.”
“While there are two new lead managers, there is still a lot of support from the team. Not only do they have a good core of younger managers there, but also a number of more experienced small cap specialists such as Paul Harwood.”
Acorn Income IT has a fixed management charge of 0.7 per cent, though charges 15 per cent for all outperformance in excess of 10 per cent. The trust is still very small with assets of just £56m, meaning that it’s flexible enough to invest even in micro caps.
