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AA-rated John McClure: seven small cap picks for success
by David Campbell on Nov 01, 2013 at 10:35
The Unicorn Equity Income manager presents some of the stocks behind his remarkable outperformance
The Unicorn UK Income manager’s selection by almost 28% of those switching from Invesco Perpetual – behind only Artemis and JOHCM in popularity – was surprising not because of his performance, which has consistently been excellent, but because his small cap and AIM-orientated approach is very different from Woodford’s.
Over the last three years McClure has returned 89.17% versus the average UK Equity Income manager return of 40.97%, from a 50-strong portfolio which avoids the FTSE 100. The fund currently yields 2.88% versus the sector average of 2.3%, according to Lipper.
The fund runs a concentrated portfolio with a target of owning no more than 5% of equity in one company. While at £408.6 million the fund remains well within the upper limit of what McClure says he would be comfortable running, at the current rate of growth it is making up the ground rapidly.
Here he introduces some of the stocks that have helped to deliver that success.
‘Any business which can persuade people to pay £7.50 for popcorn has to be doing something right.
‘It is expanding non-stop at the moment, but if it ever slows down it is going to be throwing off a lot of cash. It’s a play on people no longer taking second or third holidays – instead they will take the kids for an afternoon at the cinema – it’s more a day out than just about watching a film.
‘It is going into areas that have been underserved by cinemas for a very long time – for instance in an extreme example, it recently opened up a multiplex in Jersey.’
‘Arbuthnot is valued at around £165 million and Secure Trust Bank, which it owns around 30% of, is worth £340 million – the maths is not that difficult to do. Some of the arbitrage has closed.
‘A lot of people buy cars on hire purchase agreements, a market in which Secure Trust has a great deal of strength. And they are developing other lines – if you go to Halfords and buy a bike on zero percent finance, that is a Secure Trust product.’
‘This is a stock we have held for around 14 years. It’s managed by the third or fourth generation of the same family and they have added £60 to £70 million in shareholder value. The other thing we like is that it has a 30 year history of dividend growth - not maintaining its dividend, actually growing.
‘They split the shares last year [which has contributed to recent mis-valuation], and they keep doing this, so you have to keep adjusting how you look at it.
‘It manufactures grip flooring – the sort of stuff you see on Tube trains – but has a record of innovation and of opening up new markets: it is supplying the Brazilian and Russian Olympics.’
‘Conviviality Retail we supported at IPO about two months ago and it has done very well for us. It owns a chain of off licences in the North West, which operate under the name Bargain Booze, and has ambitious plans for growth.
‘The chief executive is ex-Waitrose, ex-Sainsbury’s, and knows a huge amount about her market. They operate a franchising programme and recently bought a London chain of wine stores called Wine Rack – which isn’t currently franchised but will be.’
‘It is a distributor in a sector which is consolidating, but it will do well in a survival of the fittest. It has reasonable exposure to northern Europe and the market has punished anything with exposure there.
‘But it is a bit like [components manufacturer] Brammer – it deserves its current valuation if you think Germany will never build another Volkswagen, BMW or Mercedes.’
‘If you receive any utility bills you will recognise its logo on the envelope. They do bulk delivery with Royal Mail doing the last mile.
‘It’s currently up 40% year-on-year - this is how we play internet retail, which I’m convinced will decimate the high street. The whole market is restructuring, we saw this year Rentokil sell Citylink to Jon Moulton for £1, which will begin to restore profit margins.’
‘[Alongside Lookers] these are companies we have known and followed for a long time. Car sales numbers are rising sharply – the market is on the move.
‘Outside of London most people go to work in their cars. Inside London, new hybrid models [currently on sale] are not liable to the congestion charge, road tax or parking charges, so drivers can save around £1,000 a year – that’s why sales are up 300% a year.’