Green shoots of recovery
Acorn Income Fund (NYSE:ATV) seeks a high income and the possibility of growth from a portfolio split between small-cap equities (70-80%) and high-yield bonds (20-30%). Long-term performance has been exceptional, with NAV total returns of c 200% over five years. A combination of deteriorating sentiment towards smaller companies and investor uncertainty following the death of founding small-cap portfolio manager John McClure in June 2014 caused the discount to widen. McClure’s co-managers provide continuity of management and, with recent NAV performance looking better, there is scope for the shares to re-rate to a level more in line with long-term averages.
Investment strategy: Dual focus to achieve income
AIF has two pools of assets with different managers: the small-cap equity portfolio (currently 73.5% of assets) is managed by Simon Moon and Fraser Mackersie at Unicorn Asset Management, while Paul Smith at Premier Fund Managers runs the income portfolio (26.5%). Both pools are the product of bottom-up stock selection. The equity managers seek companies with strong competitive positions, motivated management, cash generation and a focus on dividends, while in the income portfolio the relatively small pool of assets means the manager can access small issues of interesting higher-yielding securities that would be inaccessible to managers of larger bond portfolios.
Equity outlook: Good news and bad news
The run-up to the May 2015 general election could cause short-term volatility for investors in the UK, while fears over recession in Europe and the spectre of deflation, exacerbated by falling oil prices, could also weigh on sentiment. More positively, the introduction of QE in the eurozone may spark a reassessment of prospects, and the lower oil price is viewed as good news in many quarters. In uncertain times, a focus on dividends (see page 3) could help overcome near-term market wobbles.
Valuation: Scope for current discount to narrow
After trading at a premium for much of the first half of 2014, falling appetite for small-cap shares combined with the untimely death of founding smaller company portfolio manager John McClure saw AIF drift to a discount from June onwards. At 10 February 2015 the shares stood at a 17.6% discount to cum-income NAV, compared with 12-month average of 6.0%. Continuity of management, a strong long-term performance record and the likelihood of outperformance in a rising market because of the structural gearing all support the view that the discount could narrow in time.
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