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Unicorn: Our nimble small cap alternatives to in vogue FTSE 100 stocks

27 September 2014

Unicorn’s Simon Moon and Fraser Mackersie tell FE Trustnet how they are playing a number of the major investment themes through smaller companies instead of using popular large caps.

By Alex Paget,

Senior Reporter, FE Trustnet

Investors can find purer and more geared ways to play a particular theme by looking down the market-cap spectrum and avoiding larger companies, according to Simon Moon and Fraser Mackersie, managers of the five crown-rated Unicorn UK Income fund.

The fund is the brainchild of John McClure, who passed away earlier this year, and has a strong track record of outperformance relative to the IMA UK Equity Income sector and the FTSE All Share due to McClure’s, and now Mackersie and Moon’s, focus on small and medium sized dividend paying companies.

Performance of fund vs sector and index over 10yrs

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Source: FE Analytic
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Most turn to smaller companies because they tend to outperform large caps over the longer term. However, Moon and Mackersie say small caps can be used more effectively than larger firms within a portfolio.

“When you have found a theme you want to exploit on a large company basis, with very few exceptions there is a smaller, purer company doing the same thing in the small-cap arena. They will, frankly, give you more geared and direct exposure to that theme,” Moon said.

With that in mind, the managers highlight two of the most prominent themes in the current market and two small caps they are using to play them instead of going with more popular larger companies.


UK economic recovery: Secure Trust Bank instead of Barclays

The UK economic recovery seems to be in full swing, with the Bank of England looking to raise interest rates in the not-so-distant future.

UK retail banks, such as Barclays and Lloyds, have become more and more popular with investors over the last year or so as not only are they rebounding from very low share prices following the financial crisis and subsequent aftermath, they are seen as one of the purest ways to benefit from a stronger recovery.

However, instead of going for a FTSE 100 bank like Barclays, investors should consider using one of the challenger banks such as Secure Trust, which is listed on the FTSE AIM and has a market cap of £400m.

“The key points are that Secure Trust is covered by three analysts, while Barclays is covered by 33. Secure Trust has 550 full-time employees, Barclays has 140,000. You can see which one is under-brokered and more nimble,” Mackersie said.

“When you look in terms of profit growth, Secure Trust’s adjusted PBT increased by 52 per cent from 2012 and 2013 against a decline from Barclays - I know which stock I would rather hold. Capital one tier ratio is much, much stronger with Secure Trust and so is its average return on equity.”


“Across all sorts of metrics, we see a really well run, easy to understand, profitable, growing cash generative and dividend paying business.”

Secure Trust Bank came to the market in November 2011. According to FE Analytics, the stock has returned 224.57 per cent over that time, while Barclays and the FTSE All Share Bank index have returned around 40 per cent.

Performance of stocks vs index since Nov 2011

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Source: FE Analytic
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The stock has lost close to 20 per cent this year, while Barclays is down 14 per cent, but Moon says there is another reason why using challenger banks, like Secure Trust, is a good option in the current environment.

“From a changing regulatory and political environment, the challenger banks are probably where you want to be.”

“Politically, I don’t think any politician will mind large banks being the whipping boy as you’re never going to lose votes by flagellating large banks, but you might win a few by increasing savings rates in smaller banks.”

Our data shows that more than 60 IMA funds count Barclays as a top 10 holding, while only Majedie Special Situations Investment holds Secure Trust in its top 10.


Online retail: Clipper Logistics instead of Royal Mail


One of the other major investment themes is the growing prominence of the internet and how “click and collect” shopping is impacting the high street retailers.

To take advantage of online revolution, swathes of investors subscribed for Royal Mail shares when the Government privatised the business last year.

However, the managers say Clipper Logistics, which has a market cap of less than £150m and isn’t covered by any brokers, is a much better opportunity.

“Royal Mail normally gets a bit of a shooing from us, but obviously it was a very high profile IPO which happened at a similar time to Clipper’s IPO,” Moon said.

“When Royal Mail came to the market, it made a huge deal about the changing consumer and the fact that more people are shopping online. Clipper is an e-procurement logistics firm; it makes sure you get delivered the right stuff.”

Mackersie added: “To give an example of that, if you buy something from ASOS and return it, it goes to Clipper first. They re-package it, process the payment and then send it back to ASOS. They are specialists in that field and they do all of John Lewis fashion online.”


As well as working closely with ASOS and John Lewis, Clipper looks after SuperGroup’s online service and has recently been rewarded with Philip Morris’, the S&P 500 listed multinational, UK contract.

“It’s interesting that this changing consumer hasn’t really affected the way Royal Mail does business,” Moon said.

“Clipper will benefit from ‘click and collect’ directly, it just seems like a much better opportunity. They have only impressed since coming to the market, while Royal Mail has slashed forecasts within the first year.”

Royal Mail floated in October 2013 and our data shows that after strong trading in the first few months, it is currently down 6.36 per cent since its second day’s trading.

Performance of stocks vs index since May 2014


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Source: FE Analytic
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Clipper floated in May this year and is up close to 30 per cent over that time, while the FTSE All Share is down and shares in Royal Mail are down 16 per cent. Franklin UK Smaller Companies is the only IMA fund to count Clipper as a top 10 holding.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.