This is often a precursor to soft-closure, meaning it could be a sign for advisers and investors to seek out other options. The £87m Acorn Income fund is one of the most obvious alternatives. Run by the same manager it has actually outperformed Unicorn UK Income quite considerably, returning 121.19 per cent over three years to the 69 per cent of the open-ended fund.
Performance of trust vs fund and benchmark over 3yrs
Source: FE Analytics
The explanation for this is the particular structure of the trust, namely its heavy use of gearing, which is one reason investors need to do a bit more analysis before plumping for this option.
The trust is split between the income paying shares, which currently yield 3.2 per cent, and the zero dividend preference shares, which don’t pay a dividend but have a set redemption price of 138p at the end of January 2017.
This payment is guaranteed assuming there are enough funds for it to be made.
As there is no dividend due to these shares – commonly called “zeroes” – the income paid out to the ordinary shareholders is higher.
It also effectively provides borrowing to enhance the performance of the ordinary shares, as any performance in excess of the pre-agreed repayment amount can be invested to the benefit of the ordinary shareholders.
There are currently £25.7m worth of these shares trading at 123p, implying a gain of 12 per cent by redemption date. This compares to £61.2m worth of ordinary, income-paying shares.
The other main complication is that the portfolio is split between a small-cap equity segment run by McClure and a bond segment run by Premier’s Paul Smith.
Equities make up between 70 and 80 per cent of the portfolio with the remainder in sterling-denominated fixed interest.
McClure’s equity portfolio includes many names that are familiar from the Unicorn UK Income fund, with Berendsen, Cineworld, RPC Group and Electrocomponents among the stocks held in both portfolios. However, while there are 51 stocks in the open-ended portfolio there are only 40 in the trust, making the equity portfolio of the trust more concentrated.
Both funds have a similar tendency to outperform hugely in rising markets and perform slightly worse than their large cap counterparts in down markets.
Acorn Income did better than Unicorn UK Income in 2012 and 2013 and slightly worse in 2011. It suffered much worse than the open-ended fund in 2008, however, with the shares flying out to a 30 per cent discount at one point.
Performance of trust and fund vs benchmark in 2008
Source: FE Analytics
This extra volatility in down markets is something investors need to be wary of with closed-ended funds, and may put off those looking for a steady income.
The shares are currently trading on a small premium, reflecting the strong level of demand for income and McClure’s management.
This demand has seen the board enlarge the size of the trust over the past year: it has grown from £35.4m to its current £86.9m thanks to the issuance of both ordinary shares and ZDPs.
There has been no change in the ratio of ZDPs to ordinary shares and hence no extra gearing taken on.
McClure says that last year the fund shifted towards the domestic UK economy and to focus on IPOs, emphases that remain in 2014.
“The exposure to the UK consumer has been selectively increased during the period as confidence is gained in the UK recovery,” he said.
“The continued strength of sterling and the impact on our international earners has also contributed to the greater domestic focus of the portfolio.”
“The investment adviser believes the resurgent IPO market will continue to be a source of new opportunities in 2014 and also that the portfolio remains well positioned to benefit from the long awaited improvement in M&A activity.”
This year McClure has participated in the IPO of DX Group, which shot up 30 per cent.
The strong performance in the past year has been helped by good figures from the bond side of the portfolio, which generated returns of 12 per cent before costs in 2013. This compares to just 2.76 per cent for the average IMA Sterling Strategic Bond sector.
Performance of bond funds in 2013
Source: FE Analytics
Smith is able to buy other closed-ended funds in his part of the portfolio, and holds preference shares of Real Estate Credit and shares in Ecofin Water & Power Opportunities.
Bonds form GE Capital, Credit Suisse and Lloyds paying around 8 per cent are also significant positions.
This segment of the portfolio is hedged with a long gilt future contract, reducing interest rate risk, another complication on this unusual fund.
In a previous article FE Trustnet looked at one open-ended alternative to Unicorn UK Income.
Acorn Income offers an option for the more adventurous investor who is prepared to deal with the complications of this closed-ended fund.
The trust does have a performance fee of 15 per cent over 10 per cent made per annum, on top of a fee of 0.7 per cent.
