The latest: Unicorn UK Income

In the world of fund management, biggest isn’t always best so investors would do well to look at the funds offered by small boutique managers who may not have large marketing budgets but can deliver great returns.

One such firm is Unicorn Asset Management, a relative minnow with just £785m under management, but with an outstanding record managing funds focused on smaller and mid-sized UK companies as well as the market’s leading AIM-focused Venture Capital Trust.

One Unicorn fund that deserves particular attention is the Unicorn UK Income fund, which we rate four stars.

Launched in May 2004, the fund has been run since 2008 by veteran fund manager John McClure, previously of Guinness Flight Asset Management (now Investec).

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The Unicorn UK Income fund sits in the IMA UK All Companies sector but it differs significantly from the competition who focus on larger company shares as it concentrates on smaller companies.

Interestingly, analysis of long-term data for stock markets separately indicates that smaller companies convincingly outperform the broader market over time, as do high yielding stocks.

So in theory a fund that invests in higher yielding smaller companies should be well positioned, and the record of this fund confirms that. In particular, we see this fund as a potential option for investors with traditional income funds who are looking for additional diversification beyond blue-chip companies.

While intuitively a small-cap focused approach might sound risky, historic annual volatility on the Unicorn UK Income fund has been very similar to that of the overall UK stock market. McLure’s approach is relatively defensive with a focus on quality companies that have low debt levels, a high return on invested capital and good free cash flow that are able to sustain and grow dividends to shareholders.

Top holdings in the fund include brewer Marston’s, movie-theatre group Cineworld, textile service business Berendsen Plc, plastics packaging supplier RPC Group and distributor of electronics and maintenance products, Electrocomponents.

The fund has delivered +79% returns over 3 years and +281% over 5 years, respectively an impressive outperformance of the All Share Index of 37% and 95%.

In view of the smaller company approach, we believe Unicorn won’t want this £440m fund to get too big and might eventually soft close it to new investors.

Investors might therefore consider taking advantage of this fund while they still can.

Jason Hollands is managing director at Bestinvest