The potential risks regarding the five crown-rated Unicorn UK Income have all but diminished, according to IBOSS’s Chris Metcalfe, who has bought back into the fund over recent weeks as he rates its managers and now feels the fund is a far more manageable size.
Metcalfe, who is investment director at the group, had been one of the first to raise concerns about the ever-growing size of the lower-cap income fund, which following a stellar period of performance, had seen its AUM surge from less than £20m in March 2011 to its £715m size in mid-2014.
“The problem is, we can’t find any fund that appears to have done better when it has become bigger. For us, there is a risk in buying larger funds that you just don’t get from a smaller fund,” Metcalfe told FE Trustnet last year.
He certainly seemed to be going against the grain as since its launch in May 2004, the fund – which was one of the first to use a small-cap approach to UK dividend paying equities – had been one of the IA UK Equity Income sector’s best performers with gains of 257.75 per cent, meaning it was more than 130 percentage points ahead of the benchmark.
Performance of fund versus sector and index between May 2004 and March 2014
Source: FE Analytics
However, Metcalfe was concerned that the fund had started buying FTSE 100 stocks – a move he believed showed that McClure was enduring liquidity constraints. 
The decision to sell did pay-off to a certain extent, but not in the way that Metcalfe would have hoped.
While small and mid-caps had already begun to fall out of favour during the spring months as investors rotated out of high multiple growth stocks in the face of growing macro headwinds, the fund was rocked by McClure’s death in June of that year.
Following a very difficult period for the remaining managers Simon Moon and Fraser Mackersie, though, Unicorn UK Income has come flying back in 2015. Therefore, Metcalfe feels comfortable buying back into the fund.
“The redemptions have obviously settled down, they have proven they can still run the fund and the fact they have been brought up with the way John ran the fund is good as well,” Metcalfe (pictured) said.
It was clearly a difficult time for Moon and Mackersie as they were hit by redemptions following McClure’s death, meaning they were having to sell into a market where very few investors wanted small and mid-caps.
Another bout of market volatility hurt markets in the September of last year thanks to macro concerns such as the ebola virus, meaning Unicorn UK Income fund ended 2014 in the sector’s bottom decile with losses of 2.32 per cent.
Performance of fund versus sector and index in 2014
Source: FE Analytics
Metcalfe points out that both Moon and Mackersie, despite building up good (albeit relatively short) records on their respective Unicorn UK Smaller Companies and Unicorn UK Growth funds and having been named managers on the UK Income fund since December 2013, faced a challenged in the fact that many viewed the fund’s success as being all down to McClure himself.
However, Metcalfe says that both managers are very talented in their own right, have been fully indoctrinated into the McClure way and had far more to do with the fund’s previous returns than many gave them credit for.
Therefore, with an AUM which has fallen to £643m and the pace of inflows having slowed dramatically, he thinks now is a good time to buy back into a fund which had been one of his longest holdings.
“I’m not a huge fan of someone passing on the baton (like with Anthony Bolton at Fidelity and Ian Henderson on JPM Natural Resources) as you can’t always just train someone that will carry on like that, whereas Mackersie and Moon have the genuine talent and can,” he said.
“We had our issues with the Unicorn fund, but over time, they have slowly gone away. They have disproved them, really. I had a meeting with them six weeks ago and the fund has come back into the portfolios because we are happy with what’s going on.”
The fund has certainly rebounded in 2015 following a difficult 2014.
The fact it is a lower-cap income fund has had a lot to do with this, though. While the internationally-facing FTSE 100 has been swayed by macro headwinds such as China’s slowing growth, falling commodity prices and the prospect of higher interest rates in the US, more domestically-orientated small and mid-caps have benefitted from an improving UK economy.
This has led to a big difference in performance between mid and small-caps compared to mega-caps, but nonetheless, Unicorn UK Income has taken full advantage of this dynamic.
FE data shows, for example, it is a top-decile performer year to date with gains of 12.74 per cent. As a point of comparison, the sector average is up 4.76 per cent while the FTSE All Share has lost 0.69 per cent.
Performance of fund versus sector and index in 2015
Source: FE Analytics
Therefore, the fund is now ahead of both the sector and index since Moon and Mackersie took sole-responsibility of the portfolio.
Metcalfe added: “The question when you look at a fund is, is that track record replicable either as a result of fund size or whatever. For us the company has settled down. For a while there were risks but they have all but gone away.”
Unicorn UK Income follows a GARP (growth at a reasonable price) strategy to UK smaller companies and tries to provide a high and rising income for its investors. This is something the team has achieved in the past, as recent FE Trustnet studies has shown the fund – which currently yields 3.56 per cent – has regularly been among the peer group’s best dividend payers.
Unicorn UK Income has an ongoing charges figure of 0.81 per cent.
