"If a business can make a box of popcorn for 12p and sell it for £7.50, I want to own it," says John McClure, co-manager of the Acorn Income Fund (AIF), an IC Top 100 Fund. He bought Cineworld Group (CINE) shares to the tune of 4.1 per cent of his portfolio last week. He says the high street is dead but with the expensive snack-selling cinema chain now in his top ten holdings, and having snapped up shares in Bargain Booze owner Conviviality Retail (CVR) when it floated last week, it’s clear his conviction allows him to regularly break his own rules.
Mr McClure's main tactic is just keeping things simple. He knows what he wants, and chance is on the bottom of that list. If he buys shares in a company, he wants to be "certain" they are going to drive a return. That’s why he has a strict policy of only buying stocks that pay a dividend. He loves big profit margins, and he hates dividend cuts.
Around 18 months ago he ditched Timeweave - a company that had first taken his fancy because it owned all the rights to horse race broadcasting. But when it ceased to pay a dividend, Acorn Income gave it the boot.
As a collection of companies, Acorn's portfolio looks like a random assortment – but that’s because with just 30 stocks, it’s very concentrated. Among the biggest opportunities for future returns, in Mr McClure’s opinion, are companies that cash in on the move from the high street to the internet. One of his biggest holdings is UK Mail Group (UKM) –the express parcel delivery service. And his heaviest sector is "support services" - mainly packaging and delivery orientated businesses – which are often tied into internet businesses.
For this reason he's not interested in buying Royal Mail shares when it floats, and will stick firmly with UK Mail - which he sees as having much stronger ties to online retail. "When people buy things online, UK Mail packages and delivers those items. And more and more people are buying those things online. We won't be buying Royal Mail," he said.
The Acorn Income Fund compromises two portfolios - a 30-stock equity portfolio and a fixed income portfolio - with a rough 80:20 split between equities and fixed income to counteract the risk of the fund's gearing. It also issues two types of shares - ordinary and zero dividend preference. It recently raised £10m by issuing a mixture of these share types - and it has plans to expand on a monthly basis using tap issues (issuing new shares at a premium to the net asset value (NAV) to meet demand).
The Acorn strategy is one that flourishes in a bull market, but it's robust so it still holds up in a bear market, says Mr McClure. With consumer confidence on the rebound though, Acorn's managers are optimistic the market is entering a bull run - good news for the fund. The performance figures back up its resilience. The fund holds the gong for being the best one year performer in our Top 100 Funds - with an 80.2 per cent return over the year to 30 June 2013. And its longer term figures are also very solid.
But no fund is invincible. Paul Smith, who manages the bond side of the portfolio is worried about a bond bubble - but he's able to implement strategic decisions on the day he makes them so can react quickly to a changing market. And on the equities side, the concentrated nature of the portfolio means if one stock goes pear-shaped, the whole portfolio suffers - putting extra pressure on Mr McClure to make good decisions.
One of the fund's major advantages is its team of managers. They have over 100 years' experience between them - and they're all personally invested in the fund. Mr McClure himself owns a whopping 3 per cent of the fund’s shares, which should be comforting to investors.
The fund does have a performance fee structure in place but despite the fund's success in recent years, amazingly, none of the managers have received a performance-related penny from it since 2006. Managing director, Nigel Sidebottom jokes: "I'd like to have a word with whoever came up with that system," but he says because the fund is still fairly low profile and is expected to grow much larger in coming months, he doesn't think it'll be too long before the managers will start to see the performance fees lining their pockets.
