For investors looking for growth and income from smaller companies, I reckon the Acorn Income Fund (LSE: AIF) deserves a closer look. The fund is a standout performer in the UK small-cap space, boasting some of the best figures across the board.
An investor who had bought shares in the investment trust five years ago would have earned a total return of 176%, a significantly better performance than the FTSE SmallCap (excluding investment companies) benchmark’s total return of 112%.
The Acorn Income Fund invests 70-80% of its overall portfolio in UK-listed smaller companies, with the remainder in fixed interest securities. Equity fund managers Simon Moon and Fraser Mackersie use a bottom-up investing approach, picking companies with experienced and well motivated management, good cash generation, and growing dividends.
Top holdings in the smaller companies portion of the portfolio include Convivality (4.2%), Acal (3.7%), Clipper Logistics Group (3.7%), FDM (3.1%) and Somero Enterprises (3.0%).
Reduce capital risk
The inclusion of bonds in the fund helps to add income and reduce downside risk in an otherwise risky basket of small-cap stocks. Paul Smith, who manages the income portion of the portfolio, invests mainly in short-to-medium duration securities, which reflects his concerns on tightening monetary policy. He also hedges against potentially rising rates by holding short positions in government bond futures to reduce the average duration of the portfolio.
The Acorn Income Fund is attractively valued on its current discount of 6% on net asset value, which means investors can effectively purchase shares for less than the sum of its parts. Additionally, with its yield of 4.1%, the fund is also one of the most attractive from an income standpoint.
Biotech stocks have been one of the hottest investment areas in recent years as promising new drug developments and robust earnings growth lure investors to the sector. With this in mind, the International Biotechnology Trust (LSE: IBT) is a solid pick for investors expecting further significant gains.
The fund has been run by lead manager Carl Harald Janson since September 2013, who has 13 years’ experience in healthcare investing and a further seven years’ experience within the pharmaceuticals industry. Janson reckons there are still good opportunities from mega-cap firms due to their lower-than-market p/e valuations and robust top-line growth. What’s more, he also looks for smaller companies that are potential takeover targets, as he reckons the market is still ripe for M&A.
As expected, US large-caps dominate its portfolio, including Gilead (7.8%), Celgene (7.7%), Regeneron (6.5%), Biogen (5.9%), and Vertex (4.5%) – its five biggest positions. North American stocks account for roughly 85% of its portfolio, while European- and UK-listed firms account for the remainder. Its two biggest European positions are Shire (3.2%) and Denmark’s Genmab (3.0%).
Performance figures for the past five years show the trust earning a total return of 190%, beating its larger rival The Biotech Growth Trust, which gained 180% over the same period. And in contrast to its rival, which doesn’t pay any dividends, the International Biotechnology Trust has a dividend yield of 3.8%.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.