Q: What is the investment philosophy of the fund that you manage?

A: Unicorn Mastertrust is a fund of funds, which invests primarily in UK investment companies.

Unicorn Asset Management is ‘an investment management boutique’ as we call it in the UK. It’s independently- managed and privately-owned firm, established in May 2000 by Peter Webb, a recognized fund manager of small-cap portfolios. We started with about £140 million under management and today we manage about £400 million.

Over the past five years there has been an increasing demand and growing development of funds of funds for retail investors and advisors. In the UK they are structured as unit trusts or open-ended investment companies, or OEICs. These funds invest in the funds of other people to provide independent financial advisors and private retail investors with a managed service and portfolio diversification across a range of fund managers.

The main difference between Unicorn Mastertrust and other OEICs is that we invest primarily in listed investment companies. This sector in the UK has been established for well over a hundred years, the investors know investment trusts well, and there is a broad array of funds to choose among. Our investment objective is to provide steady growth in capital by investing in this market.

Q: What sorts of funds do you invest in?

A: That can vary enormously. The investment universe includes funds that specialize in large-cap companies in the UK, US, Europe, Japan, as well as in small-cap companies in each of those regions. There are funds within my investment universe that focus on emerging markets; there are global funds, regional funds, development capital funds, and alternative funds that use some sort of hedge strategy. There are many different types of funds to choose from, so the list is quite long.

Our philosophy is based on the idea that this sector of the UK market is almost unique in comparison to the world financial markets. There are closed type structures available in the US, France, and some parts of Asia, but the UK market is probably the most developed and mature one for closed-end funds.

We aim to take advantage of opportunities created when consensus estimate is wrong, because the underlying shares in the funds sometimes trade at substantial discounts or premiums to their net asset value. Consequently, if my top down strategy is correct, I can provide superior returns through buying investment companies that are out of favor. If my timing is broadly right, then I will not only benefit from the right asset allocation decision, but also from the narrowing of that discount at which the underlying shares trade.

Q: How large is your investment universe? How many closed-end funds do you monitor?

A: I tend to monitor the entire marketplace. A great part of the information is purely comparative and based on UK brokers, who construct tables of asset values and share prices for all the funds. That allows me to look at the discounts or the premiums on a daily basis.

There are probably about 250 securities of conventional investment companies, which are companies with straightforward capital structures. There are many other products and companies, sometimes listed on different markets. Overall, there are more than 500 securities in which I can invest, but that universe is changing with the changes in regulations. For example, over the last couple of years, many property-based funds have been created in the UK.

On a daily basis I try to get an overall picture of where all these funds stand. I’m not suggesting that I have profound knowledge of all the 250 conventional funds or the 500 securities in the universe but there are certain factors that will encourage my efforts in the research process, such as discounts, historic performance, or an understanding of the goals of the investment manager. Such factors will alert me to undertake further research of the manager, the asset class, and the style that the manager is employing. My goal is to understand the process and the philosophy of those funds and to measure the level of skill and intellect employed in their management.

Q: Could you describe your research process in more detail?

A: My premise is that there aren’t very many investment managers to choose from. There are many bright and well qualified people, but there aren’t many managers with the right blend of personality traits that are able to do the research and to use it to the advantage of their investors on a consistent basis. Moreover, to decide how good a fund manager is, you have to judge his performance over extended periods of time. I believe that you need more than 10 years of data to judge a manager, but we both know that such long track records are rare.

Before I started managing this fund in 2001, I was on the other side of the fence as a stock broker, so I was researching companies on behalf of institutional clients. I met a number of fund managers and got to understand what made them tick, how they would perform in certain market conditions, and to know the ones who don’t take a very independent and rational view of the markets. So I managed to identify a number of investment managers who were bright and committed and that one would want for the long term. To buy a fund, I have to believe that the fund manager has the capability of delivering consistent performance and that makes my sifting process much easier.

The only exception would be if the fund is trading at a massive discount to assets. If the discount is really wide, I am quite opportunistic, but those aren’t the funds that I would want to hold for the long term. The core of the portfolio is built around fund managers who can deliver consistent returns and good alpha because the cost of dealing, particularly in the UK market, can really hurt your performance. I tend to be opportunistic only with some satellite holdings because with managers of lower quality, I can be compensated by the fact that the discount will narrow in the right area.

Q: Could you give us some examples of specific funds that you identified?

A: In the core portfolio, there are a number of funds that I’m willing to hold through thick and thin. One of my largest investments to date is British Empire Securities, which is an investment company investing in undervalued assets. It is trying to buy assets at a discount. The managers of the fund run money for a number of US institutions as well. They are going around the world looking for assets that trade at a discount, so the fund is involved in some fairly complex conglomerate businesses and has built a very strong track record that survived the test of time. What I particularly like about this fund is that when the management team is feeling negative, it will move into cash or into hedging positions quite aggressively. It is that free-spirited thinking that attracts me to this fund.

Another fund in the top 10 would be North Atlantic Smaller Companies, which again, is run by an individual who has most of his own personal wealth tied up in the fund and who has built a strong track record. I also have on my list Fidelity Special Values and Candover, a fund that has a very attractive way of playing the management buyouts in the UK and Europe, and one of those rare situations that effectively give you gearing on the upside but not on the downside.