What is Your View of the Funds’ Long-Term Performance?
Both funds have delivered outstanding returns. While the performance of Evenlode Income fund has been impressive, underperforming the Morningstar category average in only six quarters in the last five years, the Unicorn UK Income fund has been even more consistent, underperforming the category in only five quarters over the same period.
This consistency is particularly impressive given the variety of market conditions that investors have encountered over that period. While the relative returns are clearly related to the quality of the managers and the processes they employ, it should also be noted that both funds have benefitted significantly from performance tailwinds. In the case of Evenlode, the key driver appears to have been an orientation towards quality companies, while for Unicorn overweight exposure to smaller companies has supported the outstanding returns.
The real test of the managers’ skill comes when tailwinds become headwinds. While this has already happened in the case of Unicorn with the sharp reversal in the relative performance of smaller companies over the last year, the Evenlode continues to benefit from investors’ appetite for stability.
What do You Think of the Fund Managers?
No discussion of the current managers of the funds would be complete without acknowledging with sadness the death of John McClure, the lead manager of the Unicorn fund in 2014. John was a veteran fund manager who ran the portfolio from 2004, delivering outstanding returns for investors. Any view of the fund and management team is necessarily coloured by this forced change.
The current managers – Fraser Mackersie and Simon Moon joined Unicorn in 2008. While they lack the experience of McClure, they worked with him on this fund for six years and are therefore very familiar with both the fund and the strategy.
The Evenlode fund has been managed since launch by Hugh Yarrow, former manager of the Rathbone High Income fund. While Hugh remains one of the more youthful managers in the UK Equity Income sector, he is fast gaining a reputation as a talented investor with a clear and consistent process. Hugh is supported by Dr Ben Peters, a former physicist who joined the management company Wise in 2008.
Although neither team benefits from the resources of the larger fund houses, this does not appear to have had a detrimental impact on returns. The success of a boutique approach to UK equity income investing is nothing new. Many of the current ‘big beasts’ in the UK Equity Income sector emerged from smaller firms with limited product ranges.
When Have the Funds Outperformed?
As befits a fund with a significant and habitual overweight exposure to smaller companies, the performance of the Unicorn fund has been correlated to the relative performance of smaller companies. In 13 of the last 20 quarters, the relative performance of the fund to the FTSE All Share has corresponded to the relative performance of smaller companies to that index. At a more granular level, the Unicorn fund has displayed a correlation of 0.88 to the FTSE All Small index and only 0.72 to the FTSE All Share.
However, while important, this dependence should not be overstated as over the last five years the fund has comprehensively beaten the small cap index which in turn has performed much better than large caps. This reflects periods when the fund significantly out-performed the FTSE All Share index when smaller companies lagged behind.
In contrast, the Evenlode fund has focused on high quality companies, especially those in the technology and consumer staples sectors. This quality orientation has provided a significant tailwind to performance in the recent past as investors have rewarded companies for stability against a backdrop of continued economic uncertainty. The positive impact of this quality bias can be demonstrated by the relative performance of the MSCI ACWI Quality index which has outperformed the broad MSCI AC World index by circa 20% over five years.
When Have the Funds Underperformed?
Unsurprisingly, the performance of the Unicorn fund has been much weaker over 2014 reflecting the underperformance of smaller companies. Unfortunately this period has corresponded with the change of management. It is not clear at this stage how much of the underperformance is can be traced to each factor and only time will tell if the new managers are able to replicate the success of the past.
It is much more difficult to pin down the source of underperformance by the Evenlode fund. However, there is understandably some correlation with under-performance by the consumer goods and services sectors.
What Do You Think of the Charges Levied By the Funds?
The ‘B’ share classes of both funds are reasonably priced although Evenlode is a little more expensive with an OCF of 0.99% compared to a 0.81% for Unicorn. Although both are significantly lower than the Morningstar category average at 1.36%, this average is likely to fall over time as clean share classes and increased price pressure drive fees lower. This price pressure is likely to be most keenly felt among those funds that fail to provide either a differentiated process or competitive track-record.
Which of the Funds Would You Recommend to Investors?
At present, neither fund holds a positive analyst rating from Morningstar. As a consequence, I would be unlikely to recommend either. However, if pressed, I would favour the Evenlode fund due to the emphasis on quality and large company orientation that is well suited to an income orientated mandate.
This article originally appeared in Portfolio Adviser magazine
