Acorn Income Fund's (AIF) shares enjoyed a significant re-rating in the second half of 2015 meaning that its wide discount to net asset value (NAV) tightened too. The trust was on a double digit discount last year, at times wider than 17 per cent, but has since tightened to less than 2 per cent. This is considerably tighter than some other smaller companies equity income trusts such as Small Companies Dividend (SDV), which is on a discount to NAV of about 11 per cent, and tighter than most non income focused smaller companies trusts.
- Discount to NAV tightented
- No defined discount control mechanism
- Relatively high charge
- Effective high debt
- Strong performance
- Attractive yield
IC TIP RATING
Tip style: INCOME
Risk rating: HIGH
Timescale: LONG TERM
While a rise in a company's share price is good for shareholders it can also pose the question as to whether it is time to take profits. There are a number of reasons to continue to hold Acorn Income: it has a consistently strong performance record, beating the Numis Smaller Companies Ex Investment Companies Index by a good margin over one, three, five and 10 years, as well as the Association of Investment Companies (AIC) UK Equity & Bond Income sector average over those periods.
The trust also offers an attractive yield of 3.7 per cent.
"But with no defined discount control mechanism in place we believe the current rating doesn't fully compensate investors for the higher risk small cap exposure and high level of leverage," says Mick Gilligan, head of fund research, Killik & Co.
Without a defined discount control mechanism the trust could swing back out to a wide discount to NAV. It also has zero dividend preference shares alongside its ordinary shares, which in effect is like having a high level of debt.
The trust's small size, with a market cap of only £59m and net assets of only £60m means it has a relatively high ongoing charge of 1.8 per cent. It also has a performance fee of 15 per cent of returns over and above a 7.5 per cent annual hurdle, although subject to a high watermark.
A solution for investors wanting to take profits could be to switch into open-ended Unicorn UK Income Fund (GB00B00Z1R87) which is run by the same managers - Fraser Mackersie and Simon Moon - and also has a strong performance record. This IC tip is among the top 10 performing open-ended UK Equity Income Funds over one, three and five years, and offers an attractive yield of 4.3 per cent. This fund focuses on small and mid-cap shares like Acorn Income, so has relatively little exposure to large-caps over which there are growing concerns about the ability to pay dividends.
And Unicorn UK Income can be picked up on investment platforms for a much more reasonable ongoing charge of 0.81 per cent, with no performance fee. As it is an open-ended fund it cannot take on debt so avoids that risk, as well as not swinging from discounts to premiums.
Unicorn UK Income is not a direct replica of Acorn Income Fund: it only invests in equities while Acorn has around a fifth of its assets in alternative areas of fixed income such as convertible bonds, run by a separate manager, Paul Smith.
If Acorn Income continues to do well and offer an attractive yield, rather than widening, its discount could tighten further and move to a premium - a level at which it has traded in the past - for example in 2013 and 2014.
And Acorn Income has historically delivered stronger returns than Unicorn UK Income.
However, with a relatively high charge, no defined discount control mechanism and a recent good run, now might be a time to take profits but continue to tap into its managers' expertise by switching to Unicorn UK Income. Sell.
ACORN INCOME FUND (AIF) | |||
| PRICE | 371.18p | GEARING | 0% |
| AIC SECTOR | UK Equity & Bond Income | NAV | 379.66p |
| FUND TYPE | Guernsey domiciled investment company | PRICE DISCOUNT TO NAV | 1.90% |
| MARKET CAP | £58.9m | YIELD | 3.70% |
| No OF HOLDINGS | 128* | ONGOING CHARGE | 1.80% |
| SET-UP DATE | 11-Feb-99 | MORE DETAILS | premierfunds.co.uk |
Source: Morningstar, *Premier Asset Management
Performance
| 1-year share price/total return (%) | 3-year cumulative share price/total return (%) | 5-year cumulative share price/total return (%) | 10-year cumulative share price/total return (%) | |
| Acorn Income Fund 0rd | 28.83 | 59.22 | 161.89 | 256.80 |
| Numis Smaller Companies Ex Investment Companies TR GBP | 3.96 | 31.24 | 63.08 | 124.66 |
| AIC UK Equity & Bond Income sector average | 5.07 | 35.56 | 52.09 | 68.46 |
| Unicorn UK Income B Inc | 6.59 | 42.04 | 89.71 | 180.14 |
Source: Morningstar, as at 1 February 2016
Top 10 equity holdings, as at 31 December 2015 (%)
| Conviviality Retail | 4.4 |
| Macfarlane | 4.1 |
| Secure Trust Bank | 4.0 |
| Acal | 3.8 |
| Clipper Logistics | 3.7 |
| Primary Health Properties | 3.4 |
| Safestyle UK | 3.4 |
| Park | 3.2 |
| Alumasc | 3.1 |
| Castings | 3.0 |
Equity sector breakdown (%)
| Support services | 16.7 |
| Construction & materials | 13.2 |
| Financial services | 12.1 |
| General retailers | 9.6 |
| Industrial engineering | 7.5 |
| Industrial transportation | 6.8 |
| Real estate investment trusts | 5.7 |
| Fixed line telecommunications | 4.1 |
| Banks | 4.0 |
| Other | 20.3 |
