Unicorn’s UK Income fund added to its holdings in financial services firms Polar Capital and Brewin Dolphin after putting a “phenomenal level” of cash into the market in March and April, as it aims to capture the trend of small and mid caps’ outperformance during an economic recovery.
Few new additions came into the fund despite stockmarkets tumbling in the early part of last year, but managers Simon Moon and Fraser Mackersie were able to top up a number of existing holdings at attractive valuations.
Two of those were wealth manager Brewin Dolphin and asset manager Polar Capital, which have been in the fund since 2009 and 2014 respectively, on share price weakness.
“Dividend payments proved to be resilient and AUM recovered strongly in the second half of the year at both firms, with Polar enjoying particular success thanks to the strong performance of its technology funds,” Moon and Mackersie told Investment Week.
One new holding initiated was healthcare software provider Emis, which is “very cash generative, with high recurring revenues” and “got sold off completely unwarranted”.
The fund takes a multi-cap approach, focusing largely on medium-sized business, meaning it has a lower weighting to the FTSE 100. The FTSE 250, though, was harder hit by dividend cuts, with Link Group’s most recent dividend monitor showing the mid-cap index saw a 56% drop through 2020 compared to the blue-chip index’s 35%.
Despite that, Moon and Mackersie said their focus on firms with low levels of debt saw them slightly outperform, with a 40% income reduction, noting the fund was “well-placed” to outperform once more through 2021.
Mackersie said concentration risk had in fact increased for UK dividends, with the FTSE 100 accounting for 90% of 2020’s total, as opposed to 85% for 2019.
However, income investors are now unable to “hang their hat” on many of the former stalwart companies and sectors, after many “rebased their dividends”.
“These were not temporary cuts, they were not pauses, they were not slight changes of dividend policy; they were complete rebasings of which companies and sectors dividends are coming from,” Moon explained.
“In periods of economic recovery, small and mid caps tend to perform fairly well. We have seen this a number of times over the years and we do not see any reason for this to be any different.
“Roll-out of the vaccine in the UK has been exceptional… and it would be easy to overlook how much, on a relative basis, this improves the domestic outlook. This will definitely be beneficial to a fund like ours, which has around 75% of its underlying revenues sourced domestically.
“Those companies will be best placed to benefit from the vaccine roll-out, but also the removal of the potential for a no-deal Brexit – those two things combined are really positive for the underlying companies in this portfolio.”
Unicorn UK Income is down 9.9% in the year to 9 February, according to FE fundinfo, compared to losses from its FTSE All-Share benchmark and IA UK Equity Income peers’ average of 7.4% and 8.2% respectively.