Lion in Unicorn reveals its prowess

Unicorn’s Outstanding British Companies portfolio challenges the notion that the country’s industry is going to the dogs. Its uncomplicated approach has produced top-decile returns.

Every one of the stocks in OBC’s portfolio pays a dividend, with the average yield at 2.8%, although the fund has no specific yield mandate.

Turnover is spectacularly low. “Last year we didn’t buy a single new stock, although we sold two. All our work goes into upfront analysis before we buy.”

Now we get to what really makes OBC tick: “One of the best things a fund manager can do is to sit on his hands and ignore the noise.” That said, another of Hutchinson’s rules of fund management is to sell on the first profit warning. Whether through luck or skill, he hasn’t had many of late.

He insists his style works in most market cycles. In 2008, the market fell 32%, but OBC fell just 19%. In 2010 the All Share index was up 17%, but OBC managed a gain of 38%.

So what are these outstanding British companies? “I’m a passionate advocate for what we have in this country, how we can support it and how we can capitalise on it.

I do believe we have a huge amount of engineering excellence in the UK, massive product innovation, and I’m always gobsmacked by the quality of management teams that I meet. The British people are incredibly resilient; we are in the early stages of a readjustment from debt that we will come through.”
Industrial engineering stocks make up 12.5% of the fund, while aerospace and defence contribute another 11.9%. Electronic and electrical equipment add another 11.4%. Chemicals are 8.8%, and pharmaceuticals and biotech 8.7%.

At one end of the scale are Rolls-Royce and British Aerospace. At the other is Abcam, a maker and distributor of therapeutic antibodies linked to the human genome project. Hutchinson first invested through Unicorn’s VCT, putting in £1.5m. When it floated five years ago, he used OBC to buy some of the stock. It has gone up six-fold since then. “It’s now on 25 times earnings, so it’s not cheap, but it’s a star in its own specialised field, and there are any number of pharmaceutical companies in the US that might want to buy it.”

Not that Hutchinson wants Abcam to sell out. It would mean he’d have to find another stock for his portfolio. And more importantly, Abcam would no longer be outstanding, or British, and you get the feeling he’d like it to stay that way.

Patrick Collison is the Guardian’s personal finance editor.