The five crown-rated fund, which has received enormous inflows from investors in recent months, has delivered 82.48 per cent over three years, putting it at the very top of its IMA UK Equity Income sector. While some investors may be worried that they have missed the boat, McClure (pictured) is confident that the fund can deliver similar and even superior returns between now and December 2016.
When asked what investors can expect from his fund, he said: "It’s easily possible for the fund to do the same in the next three years as the last. We won’t be far away – we easily have the capacity to do it, given valuations and the room for earnings upgrades."
Performance of fund, sector and index over 3yrs
Source: FE Analytics
McClure believes that the nervousness surrounding valuations is unwarranted and is a product of the general pessimism in the markets that has been present since the Lehmans crisis little more than five years ago.
"I’m definitely seeing adequate value," said the manager. "The problem is that a lot of managers haven’t been around for a very long time. Some are too young to even remember what it’s like to be in a bull market.”
"They’ve been used to haggling over a penny, and so when the markets rise like they do they get uneasy. It’s nonsense – I can see room for growth forecasts to be upgraded, and earnings will follow."
"It’s only after we’ve had all the positive news that investors start to get positive, but I can see in the car sales and the pick-up in the high street that we’re in a good position. I think we’re at the beginning of a bull market."
McClure says that investors must bear in mind that even three years ago, markets were extremely cheap. As a result, he thinks that a price/earnings (P/E) ratio of 14 times for the small cap market is far from unreasonable.
"2007 and 2008 will hopefully be the only banking crisis in my lifetime," he said. "It was at a time when I was worried about my money sitting in Barclays bank, which tells you just how bad it got."
"The markets were suicidal at the time, on six times earnings – you needed to believe that everything would come crashing down."
"The companies in my portfolio average around 17 times, but I think a lot of these earnings estimates are off. I think it’s closer to 14 or 15 times, which historically is certainly not vastly overvalued."
The manager says he is particularly confident because of the pick-up in IPO activity, and thinks M&A will duly follow.
"The big reason for my confidence is that the IPO market is so strong, which is always a good sign," he said. "We haven’t seen it this strong for a very long time."
"The public nearly put enough money up to buy the Royal Mail earlier this year, which tells you something. You also had Conviviality Retail which went on to a 16 per cent premium within three months, and Central Nic, which went on to a 100 per cent premium within a month."
"You’ve got M&A at a 10-year low as well, so I’d expect that to pick up."
"I also think a lot of analysts underestimate the impact of operational gearing. [Investment brokers] Numis Securities made just £4m last year, and this year it made £25m. That shows you just how effective it can be," he added.
McClure is optimistic that data in the eurozone and China shows that they are over the worst of their respective crises, and he believes the US is going from strength to strength.
"Thanks to fracking, the US could become self-sufficient in oil production within two years if everything goes smoothly, which changes its dynamic completely," he explained. "If this were to happen, the US economy could take off like there’s no tomorrow."
The one major headwind facing markets is the possibility of interest rate rises in the US and the UK, but McClure says it is very difficult to predict when this will happen.
"The Bank of England has no say on when rates will rise in the UK – it’s up to global bond markets," he added.
Tim Cockerill (pictured), investment director at Rowan Dartington, thinks it is possible that Unicorn UK Income has another strong three years in it, but is unsure it can get close to doubling investors’ money over the period."On one hand, McClure could well be right, but for that to happen I think we’d have to see the right underlying economic conditions," Cockerill explained.
"If growth remains subdued, I would be surprised if the fund did as well in the next three years. We came from very low valuations at that point, and though certain stocks could certainly re-rate from here, I don’t think there is much capacity for this."
He disagrees with the manager’s point regarding younger investors, insisting there are plenty – like him – who remember many years in a row of rising markets.
Cockerill includes the fund in his recommended list, but says he doesn’t use it very often in his clients' portfolios.
He says this could all change in the near future, though.
"I’d like to see a general shake-out in the markets before I’d consider this fund," he said. "If you saw a correction of 10 per cent, I think it would be interesting to see how this fund did, and reassess the situation from there."
"However, from memory I know the fund scores pretty well on the volatility front."
As well as being the standout performer when it comes to total returns, Unicorn UK Income has also been less volatile than its FTSE All Share benchmark, in spite of its bias towards small caps.
Risk/return of fund, sector and index over 3yrs
Source: FE Analytics
Over three years, it has around the same annualised volatility as its sector average.
Cockerill added: "We’ve held Cazenove UK Smaller Companies for some time and done very well with it, but that’s hard closing. We’ll certainly consider the Unicorn fund when looking at some alternatives."
Unicorn UK Income is also number-one in its sector over a five-year period, with returns of over 200 per cent, and is top decile over one year as well.
It requires a minimum investment of £1,000 and has ongoing charges of 1.57 per cent. It is currently yielding a touch under 3 per cent.
To find out which stocks McClure has recently been buying, click here.
