Backing outstanding British companies

Over the last five years, Mr Hutchinson and co-manager John McClure have both managed to find outstanding British companies, and under the banner of the Unicorn Outstanding British Companies Fund deliver stellar performance.

The fund, which was launched in December 2006, is one of the top-performing funds in the IMA's UK All Companies sector which features almost 300 funds, delivering a total return of 46.6 per cent compared to a measly 1.5 per cent by its benchmark, the FTSE All-Share index.

Despite a dismal economic background and volatile markets dominating the past five years of the fund's life, Unicorn Outstanding British Companies or OBC for short, has managed to deliver top-decile performance over one, three and five years.

And, according to Mr Hutchinson, its all about keeping it simple. "Fund managers are often guilty of over-complicating things. It's about defining your investment criteria and sticking to it."

Mr Hutchinson looks to identify British companies that operate on a global scale providing specialist products and services in sectors which offer genuine barriers to entry. He then buys and holds.

Mr Hutchinson explains that he does not look specifically for value, growth or income. "We look for quality at a reasonable price and then from there we build up a matrix of what the intrinsic value of the business is. It is important to identify where the value creation in the business is coming from.

"Yes it is formulaic, but by applying the same thought process we achieve consistency and minimise the scope for errors. We also don't overtrade. If we get it wrong we try to understand why and then move on. For example, we will sell on the first profit warning - it's a zero tolerance policy."

While sector agnostic, the managers do aim to avoid pre-revenue, cash burning sectors such as mining and resources and biotechnology. There is also no exposure to financials in the fund with the managers having taken the view pre-credit crunch that the complex balance sheets of the banks made this a no-go area.

The managers typically take a three- to five-year view on stocks, which means portfolio turnover is, as Mr Hutchinson puts it "massively low" - in the last 24 months it has been a case of two stocks in and two out.

Chris Hutchinson

In keeping with the managers' high conviction approach, the fund is highly concentrated with only 24 holdings and more than 50 per cent of the fund is held in its top 10 holdings. This is not because the managers are bereft of buying opportunities or ideas. On the contrary, Mr Hutchinson is upbeat about the prospects for the British industry. "British management teams are world class and our engineering skills in particular are unequalled. This reputation for excellence is reflected in the fund's investments."

Examples of holdings include Rolls Royce, the fund's largest holding, British American Tobacco and Reckitt Benckiser Group. But the fund is not just a portfolio of British mega-caps - it also invests in niche businesses. Unicorn's Aim-focused VCT, the largest in the market, acts as a good 'nursery' for such companies, and as the businesses grow and develop they in turn become candidates for inclusion in other Unicorn funds which are all UK- and equity-focused.

A good example of this is Abcam, a manufacturer and distributor of therapeutic antibodies linked to the human genome project. Unicorn first invested in the company via its VCT when it floated six years ago, later migrating it to the small-cap fund. In December 2006, it added the stock to the Outstanding British Companies fund and has since witnessed it go up sixfold over that time.

While Unicorn is a small outfit compared to the M&Gs of this world, its team of six boasts more than 100 years' collective experience with a strong emphasis on depth of research.

As an owner-managed firm, the fund managers own around 60 per cent of the equity in the business, which means for Mr Hutchinson and his colleagues the stakes are high. "It is our future - our destiny is in our hands. Our interests are aligned with that of investors."

Unlike most of the big houses, the business is not driven by the need to develop new products - the last new launch was Outstanding British Companies Fund five years ago and with seven funds in Unicorn's stable it is unlikely to launch any new funds. "It's not about gathering assets," says Mr Hutchinson.

While Unicorn's VCT is now fully invested, it has served as a useful way for the managers to get to know businesses at a very early stage. The emphasis for the firm is now on nurturing these companies, and migrating them, as they grow, to other funds starting with the Unicorn small-cap fund.

"For us this is a logical way to run a long-term business," explains Mr Hutchinson."If we get it right at the front end, performance will take care of itself." Perhaps the way to run an outstanding British company?