Interactive Investor

Coronavirus ii ACE 30 update: Unicorn Ethical Income

interactive investor's analysts bring you an urgent update on this ii ACE 30 rated ethical investment.

2nd April 2020 16:20

Dzmitry Lipski from interactive investor

interactive investor's analysts bring you an urgent update on this ii ACE 30 rated ethical investment.

The coronavirus outbreak and subsequent pandemic have had a significant impact on the global economy and financial markets. Many share and fund prices have fallen sharply in a very short space of time, as has the cost of oil and other commodities. Volatility has reached levels not seen since the peak of the financial crisis in 2008, and many assets remain prone to sharp movements both up and down.

Given these unprecedented circumstances, with citizens in many of the world’s largest cities confined to their homes, we are collecting updates from managers of funds on the ii ACE 30 rated list of ethical investments. 

Here is the latest from Fraser Mackersie and Simon Moon at Unicorn UK Ethical Income fund on 30 March:

The View from home

In light of the current market moves and the increased restrictions on day to day life we wanted to take this opportunity to update investors on Unicorn's new working practices as well as what the managers have been seeing at a portfolio level and in the wider market.

The investment and senior management team meet digitally and regularly to assess any potential impact on Unicorn Asset Management’s ability to continue to manage investments uninterrupted.

In addition to these meetings the managers continue to undertake the usual investment committee communications. Unicorn has for some time operated a cloud-based IT infrastructure which provides staff with full access to Unicorn’s systems from home, where all staff are now based.

All face to face meetings have been discontinued for now with managers continuing to meet and interact with company management teams via calls and web conferencing.

We intend to continue to provide clients with as much transparency and information as possible on the ongoing situation as far as it affects Unicorn Asset Management Limited.
We remain confident in our ability to continue to deliver on our responsibilities to clients.

Volatile Markets

Conditions remain challenging for all equity investors, but Unicorn’s Managers are long term, fundamental stock pickers and their process across the funds has not changed. The managers assess each company on an ongoing basis and like to back them for the long term.

Having said that, as active managers, the team will look to be decisive when they see threats and opportunities created by heightened volatility in the market.

In the early days of the crisis the Managers did not rush into any immediate knee jerk changes to portfolios. Instead they took time to assess the most prominent risks to each of the underlying holdings. Unicorn’s high conviction approach requires the team to be very close to the underlying companies which they monitor daily.

When speaking to management they are looking for two key risks:

1) Those whose end markets have been fundamentally weakened in the immediate term as a result of Covid-19

2) Those whose balance sheets may cause some concern in such a heightened risk environment

There are also those companies in the portfolios whose operations won’t be affected by the UK wide shutdown (and even some that may benefit). In these cases the Managers are assessing whether to top up positions. They will continue to assess each stock individually and feel they are well set to take advantage of investment opportunities as and when they arise.

 Unicorn UK Ethical Income

Holdings: 34
Cash: ~12-14%
 

PerformanceYear-to-date1 Year3 Year5 Year
Ethical Income-33.1%-23.9%-15.3%n/a
IA UK Income-28.8%-20.6%-18.1%n/a
All Share (ex IT)-27.5%-20.2%-15.0%n/a
NSCI (ex IC)-36.6%-27.1%-20.7%n/a

Background

  • Prudent companies prepare for a downturn and tightening economic conditions however no company can prepare for a complete cessation of demand
  • Severe declines and volatility in equity markets
  • All sectors caught up in sell-off
  • Widespread dividend cuts as companies prioritise liquidity has had an impact on forecasts and forward yields
  • Large caps have outperformed small caps, Unicorn Funds outperformed small caps (NSCI)

Action

  • Our long-term process remains unchanged and we continue to meet management teams, albeit in a virtual format
  • Portfolios well positioned coming into this crisis with well-managed, cash generative, financially strong holdings throughout
  • Decisive action was taken where necessary
  • Selectively de-risked the portfolios by reducing exposure to balance sheet and end market risk

Portfolio

  • Holdings reduced from 36 to 33 companies since beginning of March
  • The fundamentals of underlying holdings remain robust with low levels of net debt across the portfolio
  • Companies most directly impacted can survive a long-term shutdown and emerge in a strong position
  • Many companies also continue to operate close to normal levels
  • Cash at c.15-17% providing a foil to volatility and ‘dry powder’ to put into oversold stocks
  • Cineworld (LSE:CINE), a holding for 10 years, was disposed of due to potential of extreme end market disruption (cinemas subsequently closed), high levels of debt, and limited future dividend prospects.

Outlook

  • With the length of the shutdown unknown, short term valuations have become almost meaningless 
  • We differentiate between ‘the virus’ and ‘the stimulus’ and view the turning point as when the virus is under control 
  • Market still underestimating the length and depth of disruption in many sectors 
  • Long and growing watch list of high-quality oversold companies we don’t currently own 
  • Portfolio well placed to benefit from the recovery 

Source: Unicorn Asset Management 30/03/2020

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