Unicorn’s top-performing UK Income fund has suffered an unusual period of underperformance that has seen it drop to the bottom quartile of its peer group for the past year.
The fund is solidly top quartile in the IMA UK Equity Income peer group across three-, five- and 10-year periods, according to data from FE Analytics, but has slumped to the bottom quartile in the past year with a 1.8 per cent return compared to the 6.8 per cent average return from the sector.
Managers Simon Moon (pictured) and Fraser Mackersie said 2014 had been a tough year for them, given that small caps, which the fund is skewed towards, had underperformed.
They said the performance of the past year had been “disappointing” and “frustrating”.
The duo added that the fund was usually used as a complement to funds that focus on FTSE 100 companies, so they would not be changing their strategy.
However, the managers said they had temporarily increased their exposure to the more liquid FTSE 100 index this year to 6.4 per cent as well as raise cash to 6.3 per cent, as they await initial public offerings (IPOs) from companies listing their shares for the first time.
“We are preparing for a rampant initial public offering market and holding stocks in the FTSE 100 as a waiting spot,” he said.
The process leading up to an IPO for a smaller company is longer than that for larger counterparts and gives fund managers more time to scrutinise a firm, the duo said.
“Some fund managers complain that IPOs do not offer enough time to do a proper analysis of a company,” Mr Moon said.
“But for smaller companies we often have seen the company and have analysed it for several months prior to the IPO, so we do not have that problem.”
One of the next IPOs the managers are considering is Aldermore, a retail ‘challenger bank’, which will offer shares to the stockmarket in October. They already hold some stock from a similar challenger bank, Secure Trust Bank.
Messrs Moon and Mackersie said they were keen on these small financial institutions.
While major financial players are being hit by a profusion of regulation, they believe that their smaller competitors can provide “purer” alternatives.
“Financial institutions are facing a tough regulatory environment,” Mr Mackersie said.
“Coupled with that, politicians are not going to lose anything by [criticising] a bank like Barclays and they will probably get a cheer if they are positive about challenger banks.”
But the management duo admitted there were some areas they could not gain access to through smaller companies. Oil, gas and mining are concentrated sectors that are dominated by major players.
These are not the only sectors absent from the pair’s portfolio. Pharmaceuticals and biotechnology sectors are also omitted.
The managers joined the fund at the end of last year and took on full management when former manager John McClure died in June at the age of 50.
