Unicorn Outstanding British Companies: June 2023 update

• Unicorn is a specialist investor in smaller companies
• Manager Chris Hutchinson has a good long-term track record, boosted by his ability to select outstanding businesses
• The managers are looking to invest in companies that are market leaders with enduring competitive advantages
• The fund does not feature on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

The Unicorn Outstanding British Companies fund aims to grow your money over the long run by investing in high-quality UK companies of all sizes, although it invests more in small and medium-sized companies than most other UK funds. We think smaller businesses have great long-term potential, but they're higher-risk. This fund could be added to a more adventurous portfolio, or work well alongside funds focused on bigger businesses.

We removed the fund from the Wealth Shortlist in October 2021 due to concerns about the firm's governance framework, which we believed could have been better at managing investment activities and mitigating risk. We also thought Unicorn carried a high degree of key-person risk, with one individual responsible for a number of the firm's important functions.

Since then, we’re pleased to see that the investment risk function at Unicorn has received more resource which has helped reduce key-person risk. Overall, we believe the firm is moving in the right direction and we continue to monitor further changes.

Manager

Chris Hutchinson has two decades of experience investing in and researching smaller companies. He also has experience managing VCTs (Venture Capital Trusts) which invest in early-stage businesses that need investment to develop and grow. The Unicorn Outstanding British Companies Fund gives him the flexibility to invest in companies of any size.

Hutchinson also manages the Unicorn AIM VCT and serves as a Director of Unicorn Asset Management. These responsibilities have taken up an increasing amount of Hutchinson’s time in recent years, and day-to-day management of the Unicorn Outstanding British Companies fund has fallen to co-manager Max Ormiston. Hutchinson still has oversight of the fund, and gets involved in the bigger decisions, such as new purchases and sales, but we expect Ormiston’s influence over the fund to continue to grow.

Ormiston has been a member of the Unicorn investment team since joining the firm in 2014, and formerly spent four years with Brewin Dolphin where he worked as an investment manager. The duo are also supported by the wider Unicorn investment team.

Process

The managers look for five main things in the companies they invest in:

Simplicity – businesses that are easy to understand and sell products and services that customers couldn’t do without. Many of the companies they invest in operate in niche areas, which often go overlooked by larger firms.

Consistency – businesses that have a strong track record of growing earnings, revenues and dividends over the long term.

Transparency – the managers must be able to understand the company's financial accounts in full. They like to see companies stick to what they know and focus on growing their business over the long term. Ideally, they should under promise and over deliver, not the other way around.

Alignment – founders and management should retain a meaningful stake in their own businesses after listing on the stock market. This ensures management teams are more risk averse. They focus on growing the business over the long term and appropriately rewarding shareholders through dividends.

Permanence – they're not looking for businesses that grow quickly in the short term because they're trendy or fashionable. They want to be long-term partners with businesses over a period of five years or more.

Truly outstanding companies are hard to come by, and the managers don’t think there are many out there. They tend to invest in a fairly small number of companies. It means each one can make a big contribution to performance, but it's a higher-risk approach. The fund has around 25% of its assets invested in AIM-listed companies. Investments in these companies add risk and past performance is not a guide to the future.

The managers have made some changes to the fund over the last 12 months. This has included adding the likes of consumer goods business Reckitt Benckiser Group to the fund. The managers felt they had an opportunity to invest in a high quality market leader, trading at an attractive valuation and so bought some shares. The managers sold the fund’s position in Spirent Communications after seeing a more uncertain near-term outlook for the business which they felt challenged the investment case, despite it having the potential to benefit from some longer-term trends. 

Culture

Unicorn specialises in smaller companies. Companies will often transition from Unicorn's VCT product, through its Smaller Companies fund and on to the Outstanding British Companies fund as they grow larger. This allows the managers to build strong, long-lasting relationships with the companies they invest in. We think this detailed knowledge gives them an edge over other investors.

Unicorn is a smaller operation than many of its competitors, but they outsource any functions not considered core to managing investors' money, such as sales and marketing. This means managers can focus on their fund management responsibilities. The Unicorn Outstanding British Companies Fund is also smaller than many of its peers in the IA UK All Companies sector. This means it’s more agile and the managers can quickly take advantage of new opportunities as soon as they become available.

The Unicorn investment team has remained stable over the years. Hutchinson and many other Unicorn fund managers are shareholders in the business meaning they're dedicated to its long-term success. Overall, we're comfortable that the managers' interests are aligned with those of investors.

ESG integration

Unicorn has been something of a laggard on ESG, although this is partly explained by the firm’s relatively small size in comparison with many of its peers. However, since the firm signed up to the PRI in August 2020, it’s become much more proactive.

All Unicorn fund managers now consider each company’s impact on the environment and society, and its approach to governance. Unicorn’s investment process tends to lead them towards higher quality companies, so little has been invested historically in areas like gambling, tobacco and doorstep lenders, but these areas are now excluded under the firm’s ESG policy. Oil & gas and mining companies are unlikely to be invested in because of the potential for ESG related controversies, but there is no outright exclusion covering these areas. Controversial weapons have long been excluded from Unicorn’s funds.

Unicorn uses its votes wherever it is able, although their investment process, which prioritises firms with high quality management teams, means they rarely feel the need to vote against them. The firm’s voting record is published on its website annually, although no rationale is included. Unicorn fund managers meet with company management teams regularly, although they are less transparent on the outcomes of these engagements than some peers.

Within this fund, alongside their more traditional company research, the managers conduct an ESG review of all potential investments, with input from the firm’s Ethical Officer. If any company fails this review, it isn’t considered for the fund, or any other Unicorn fund.

Cost

This fund has an ongoing annual charge of 0.82%, but we've secured HL clients an ongoing saving of 0.35%. This means you pay a net ongoing charge of 0.47%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund's long-term performance has been impressive, with the fund having significantly outperformed the FTSE All Share index since its launch in 2006*. Remember past performance is not a guide to the future.

However, more recently the fund hasn’t performed as well. Over the last 12 months, the fund has delivered a return of -4.74%, lagging behind the FTSE All Share index return of 6.04%, and the IA UK All Companies peer group average return of 1.62%. Over this period, our analysis suggests that the fund’s investment in support services business RWS has been one of the larger detractors from performance. Some of the fund’s holdings have performed better though. Our analysis suggests that the fund’s investments in financial company Curtis Banks Group and consumer goods business Unilever have been among its better performers.

The fund’s focus on higher-quality companies means we'd expect it to fall by less when stock markets fall. But it's likely to underperform if markets rise rapidly. Remember all investments fall as well as rise in value, so you could get back less than you invest.

Past performance is not a guide to the future. Source: *Lipper IM 30/04/2023.

Find out more about Unicorn Outstanding British Companies including charges

Unicorn Outstanding British Companies Key Investor Information