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Magical Unicorn

Smaller company funds in general have fared worse than UK equity funds over the past five years or so. However, the top performing smaller company funds, where real skill is required, have performed much better than the top performers in the UK equity sector.

For example, over five years to November 1, 2008, the top performing UK smaller company fund gained 68 per cent against a 42 per cent increase by the top performer in the UK equity sector. Over 10 years, the difference is startling. According to Morningstar, the top performing UK equity fund gained 186 per cent against a 473 per cent rise by the top performing smaller company trust.

After a market crash, smaller company shares usually recover more quickly than bigger companies. I am therefore recommending a fund whose record to October 31, 2008 has been consistent top quartile performance over three years, especially over the last three months when it is the second top performer and over the last month when it is the top performer of all.

It is the Unicorn UK smaller companies fund managed by a specialist smaller company team headed by Chris Hutchinson and John McClure. They believe there has been a largely indiscriminate Aim market sell-off so that the valuation of smaller companies is near historical lows. They believe now is the time to exploit the current market opportunity which they believe is probably approaching the maximum point of pessimism.

They select shares where revenues, earnings and cashflows are predictable and which sell products and services in growing markets and also have market leading positions and lasting competitive strength. I like it as a long-term investment.

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