Best in class: Unicorn UK Smaller Companies
“Small is beautiful” is a phrase often used by many a headline writer.
It was first coined in German-born British Economist Ernest Friedrich Schumacher’s 1973 book of the same title.
The book covers issues ranging from conventional industry and economics, to messages about philosophy, religion, education and ethics.
And, in 1995, it was ranked by The Times Literary Supplement as one of the 100 most influential books published since World War II.
Since the Brexit vote in 2016, small has been not only beautiful for UK investors, it has also been resilient.
Those who were heavily invested in UK smaller companies on 24 June 2016 could have been forgiven for panicking, as these companies were deemed to be the big losers: their strong domestic exposure was expected to lead to them suffering more than their larger internationalised FTSE 100 counterparts.
Three and a half years later and they have comfortably outperformed their larger peers since the referendum, with the average UK small-cap fund in the Investment Association UK Smaller Companies sector returning 52.3 per cent, compared to the average UK All Companies fund, which returned 36 per cent and the FTSE 100 Index itself that returned 34.5 per cent.
With the UK still undervalued, it is clear that plenty of these companies are much more than simply domestically-focused business relying on the political impasse to be broken.
Small-caps are almost the purest form of active management you can find.
It is all about unearthing those hidden gems that drive returns.
This week’s best in class is a great example of such a fund.
The Unicorn UK Smaller Companies fund launched in 2002 and is a very high conviction fund of around 40 stocks.
It focuses on company fundamentals and aims to make long-term investments.
It has been managed by Simon Moon since March 2013.
He joined the asset manager in November 2008, having previously worked at both JM Finn and the National Health Service.
When it comes to investing, Unicorn is a bottom-up investor applying a top-down macro overlay at stock, sector and geographical levels.
The investment process begins with a number of quantitative screens, for profitability, debt levels and analyst coverage.
The fund avoids companies in the oil and gas, mining and biotech sectors.
All companies must be profitable at the point of investment and the team looks for those with lasting competitive advantages, experienced management teams and strong balance sheets.
Regular company meetings are key.
Investment ideas are rigorously researched and analysed in-house by a team with dedicated small-cap experience, enabling them to more accurately assess the true value of a company.
A systematic selection process leads to a fund of stocks that are weighted in accordance with the manager’s high conviction.