Acorn Income Fund Ltd targets a high income and the opportunity for capital growth by investing the majority of its assets in smaller quoted UK companies, with up to 30% in a portfolio of higher-yielding securities such as bonds, preference shares, investment companies and structured notes. Its long-term performance record is compelling, with 10-year share price and NAV total returns of c 270-280%, and it also ranks second or first in its peer group (AIC UK Equity & Bond Income) for NAV total returns over one, three and five years. The fund is structurally geared using zero-dividend preference shares (ZDPs), which were refinanced in early 2017, extending their life until 2022 at a much lower gross redemption yield of 3.85% (previously 6.5%), meaning ordinary shareholders feel the benefit of gearing more quickly in a rising market. Hedging may be used to reduce risk in either portfolio, and AIF’s ordinary shares currently yield c 4%.
Investment strategy: Dual structure boosts income
AIF has two portfolios, with the majority (c 70-80%) in small-cap equities, run by Simon Moon and Fraser Mackersie at Unicorn Asset Management, and the balance (c 20-30%) invested in high-yielding securities and managed by a team led by Paul Smith at Premier Fund Managers. Stock selection in both portfolios is bottom-up. The small-cap managers seek well financed, cash-generative firms with competitive advantages in growing end-markets, while the income portfolio adds diversification of capital and income returns, and helps to regulate the level of gearing.
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