Acorn Income Fund (AIF) saw a significant bounce back in performance during 2019, boosted by greater clarity on Brexit following December’s general election. In what was also a good year for the operational performance of companies in AIF’s small-cap portfolio (c 77% of assets), the fund ended the year with an NAV total return of 27.4%. This was ahead of the benchmark and more than made up for losses in 2018, meaning the fund has also regained its medium- and longer-term record of outperformance. While the smaller companies managers (Simon Moon and Fraser Mackersie at Unicorn Asset Management) are very positive on the prospects for both capital and income in the year ahead, the income portfolio managers (Chun Lee and Robin Willis at Premier Miton) are less sanguine, and remain focused on absolute returns as a result.
UK small-cap equities have been out of favour with both domestic and international investors since before the UK’s referendum on EU membership in 2016, yet this broad universe of c 800 companies contains many well-financed, cash-generative companies with significant re-rating potential. While the December election result had an immediate impact on valuations, smaller companies are still playing catchup versus mid-caps, despite arguably superior growth prospects.
◼ Dual portfolio structure offers small-cap growth and income alongside absolute return-focused yield diversification.
◼ Strong record of long-term performance with potential to benefit further from rerating of UK small caps.
◼ Dividend yield of c 5%, paid quarterly and growing at c 10% a year.
At 23 January 2020, AIF’s ordinary shares were trading at a 12.5% discount to cum-income NAV. While this was in line with the one-year average discount, it is well above longer-term averages (c 7–9%), suggesting significant potential to narrow. Meanwhile, the 5.0% dividend yield is significantly higher than the 1.5% average for UK smaller company investment trusts.