A major problem for UK equity income seekers is concentration risk – many funds have similar top holdings because a large proportion of UK dividends come from just a handful of mega-cap stocks. One way around this is to look to overseas equity income or UK income funds focused on medium-sized and smaller companies. Unicorn UK Income Fund ticks both of these boxes: it has a bias to UK small-caps that generate most of their revenues via overseas growth, in particular from fast-growing economies in the Far East and China. This different approach means the fund is a useful diversifier in a portfolio.
- Top long-term total returns
- Experienced manager
- Diversifies equity income exposure
- Sustainable yields
- Yield lower than peers
- Volatility
IC TIP RATING
Tip style: INCOME
Risk rating: MEDIUM
Timescale: LONG TERM
Unicorn UK Income's impressive returns put it on the shortlist for the Best UK Equity Income Fund in Investors Chronicle's recent fund awards. The fund is top of the UK Equity Income fund sector for total returns over three years and second over five years, beating more than 80 funds. It has consistently achieved top-decile performance in its sector over three and five years since its launch in 2004, according to fund research company Lipper.
It has also beaten its benchmark, the FTSE All-Share, over one, three and five years.
The fund's manager, John McClure, has a buy-and-hold investment strategy, which he says results in a very low turnover of just 2 per cent. This boosts returns because the fund spends less money on trading costs.
Mr McClure has specialised in investing in UK smaller companies for more than 20 years, and manages the smaller companies portfolio within the Acorn Income Fund (another IC tip). He is also co-manager of the Unicorn Free Spirit, Unicorn Smaller Companies and Outstanding British Companies funds.
Unlike many investment management firms, Unicorn is majority-owned by the directors and management, which it says incentivises them to ensure the funds perform consistently.
Since Unicorn UK Income is focused on small caps – more than 96 per cent according to Morningstar – it is likely to be more volatile than funds biased to large companies. For example, while the fund maintains top medium and long-term returns, over one year it makes a loss – unlike most other funds in the equity income sector.
Unicorn UK Income also maintains a concentrated portfolio of 30 to 50 stocks, which increases risk. It has 40 holdings at present, but is fairly well diversified across industry sectors with only one – support services – accounting for more than around a fifth of assets.
The fund delivers sustainable dividends, which result in a reasonable 12-month yield of 3.31 per cent, and running yield of 4.54 per cent, although this is not the highest in the UK equity income sector. Unicorn says the fund is suitable for investors who are interested in participating in the UK equity market while receiving an income.
But even if you are an income investor, it is important to invest in a fund that makes good returns as well as a high yield, as there is no point in having the latter if the fund is losing you money. So if you can take some volatility and have a longer-term investment horizon, Unicorn UK Income is a buy.
UNICORN UK INCOME A Inc (GB00B00Z1S94) | |||
|---|---|---|---|
| PRICE | 148.87p | MEAN RETURN | 29.88% |
| IMA SECTOR | UK equity income | SHARPE RATIO | 1.84 |
| FUND TYPE | Open-ended investment company | 1-YEAR PERFORMANCE | -2.49% |
| FUND SIZE | £40.18m | 3-YEAR ANNUALISED PERFORMANCE | 30.02% |
| No OF HOLDINGS | 40 | 5-YEAR ANNUALISED PERFORMANCE | 4.04% |
| SET-UP DATE | 24 May 2004 | TOTAL EXPENSE RATIO | 1.60% |
| MANAGER START DATE | 24 May 2004 | YIELD | 3.31% |
| TURNOVER | 2%* | MINIMUM INVESTMENT | £2,500 |
| STANDARD DEVIATION | 15.92% | MORE DETAILS | www.unicornam.com |
Source: Morningstar, *Unicorn Asset Management. Performance data as at 2 April 2012.
Top 10 holdings as at 29 February 2012
| Castings | 5.8 |
| Vp | 5.2 |
| Brewin Dolphin | 5.2 |
| James Halstead | 5 |
| British Polythene Industries | 4.5 |
| Arbuthnot Banking Group | 4.4 |
| RPC Group | 4.3 |
| Mucklow Group | 4.2 |
| Phoenix IT Group | 4 |
| Acal | 4 |
Sector breakdown
| Support services | 21 |
| Financial services | 11.7 |
| General industrials | 10.6 |
| Software & computer services | 8.9 |
| Construction & materials | 8.6 |
| Industrial engineering | 6.4 |
| Real estate investment trusts | 5.3 |
| Travel & leisure | 4.7 |
| Cash | 5.20 |
| Other | 17.60 |
