Q. What is the underlying methodology behind the fund?
The Unicorn UK Income Fund is a UK only, long only equity fund with a target yield of 110% of the FTSE All-share yield. To be eligible for inclusion in the Unicorn UK Income Fund a potential investee company must demonstrate the following characteristics:
Clear and understandable business model – the fund manager must be able to easily understand the business fundamentals.
Predictable revenues, earnings & cash flows
Strong balance sheets & low core debt
Significant market share & lasting competitive advantage
Specialist products or services sold into growing market sectors and territories
The Unicorn UK Income Fund is managed by John McClure who is supported by the rest of the Unicorn investment team. The portfolio is managed on a high conviction basis with a maximum of 50 holdings.
Q. Which types of companies are favoured for investment?
We predominantly operate at the smaller end of the market capitalisation scale. In order to differentiate the fund from the mainstream equity income sector, the Fund deliberately avoids holding FTSE 100 stocks. We have long favoured profitable, cash generative businesses that generate a high and growing proportion of their revenues from selling into multiple international territories.
In the past 12 months we have also sought to benefit from increasing evidence of UK economic recovery by selectively increasing our exposure to companies serving the UK consumer market. Preferred themes include financial services businesses, motor retailers, low-ticket leisure retail businesses and parcel delivery companies focused on the growth in online retailing. We continue to avoid sectors that we find difficult to understand or value – these include house-builders, oil and gas exploration, mining and commodities, insurance, biotechnology and advanced technology development .
Q. What do you accredit as the main reasons behind the success of the fund over the past 5 years?
In performance terms the fund management team have a long established and successful track record of adding value through consistently strong stock and sector selection which has been achieved through a combination of experience and common-sense allied to a disciplined and structured investment process. A considerable level of due diligence is undertaken before committing capital to a new investment opportunity.
The Fund is run on a high conviction basis comprising no more than 50 stocks and zero exposure to FTSE 100 companies. We adopt a long term approach to investment with 5 year holding periods for investments being commonplace – this reduces portfolio churn and in turn minimises the considerable frictional costs associated with frequent trading.
In terms of attracting fund inflows growth has come from the Fund’s successful differentiation when compared with the rest of the sector.
Q. How do you see the UK economy performing over the next 12 months?
We have selectively increased the Fund’s exposure to the UK consumer as we expect to see a continuation of recent UK economic recovery.
Q. What do you think will be the main challenges for the fund over the following year?
The Unicorn UK Income Fund has grown significantly in recent times through a combination of consistently strong performance and healthy and growing fund inflows – we expect this to continue.
We have a clearly communicated strategy of not owning FTSE 100 stocks, at the point of investment, and of not holding more than 50 investee companies. Where possible, we also avoid owning more than 5% of the issued equity of an individual company since the need to declare a holding size above this level restricts flexibility. This means that there is a natural capacity constraint on the size of the Fund. On current estimates, we believe that the Fund can grow to c. £750m before we have to seriously consider closing the Fund to new investment.
The main challenge for the Fund over the next twelve months is therefore likely to be how best to communicate and manage that process without disappointing investors and /or compromising performance – a plan is already in place to deal with these potential issues.
This document does not constitute an offer to sell or any solicitation of any offer to buy securities or any other instrument described in this document. Unicorn Asset Management Limited has expressed its own views and these may change. The data contained in this document has been sourced by Unicorn Asset Management Limited and should be independently verified before further publication or use. Neither this nor any other statement (oral or otherwise) made at any time in connection herewith constitutes an offer to sell or exchange units in the fund or any other fund or product and is not soliciting an offer to buy or exchange and does not constitute an invitation to subscribe for, buy or exchange any units in the Fund or any other fund or product in any jurisdiction where the offer, sale or exchange is not permitted. Potential investors are advised to obtain and review independent professional advice and draw their own conclusions regarding the economic benefits and risks of investment in the fund as well as the legal, regulatory, tax and accounting aspects in relation to their particular circumstances.