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How Mark Slater is bouncing back - and why his income fund is flying

How Mark Slater is bouncing back - and why his income fund is flying

Mark Slater had a pretty good recovery. Between December 2010 and February 2012 he was Citywire AAA-rated in 11 out of 15 months and AA-rated for the remainder.

Following a spectacular run between 2009 and 2011 when he comprehensively beat his peer group on both total and risk-adjusted returns, things  began to falter. The manager then trailed the competition through 2012 up to the middle of this year.

Things have begun to turn around. Over the short term he appears to be making a good start on regaining some of his old sector-beating ways, with his MFM Slater Growth and Recovery funds ranking fourth and fifth out of the 288-strong Equity UK All Companies peer group on a three-month basis.

But the damage still lingers. Over three years his MFM Slater Growth fund is ranked 91st out of 265 funds. Even over the past year the fund sits at 218th out of 279. Meanwhile, over the past three years, his Recovery fund is ranked 259th out of 265 funds.

So what went wrong?

‘We were punished for not holding value,’ says Slater. ‘It’s not really an area that we have a lot of interest in. Almost from the moment when [European Central Bank president] Mario Draghi stood up and delivered his “whatever it takes” speech, value rallied to the exclusion of growth.

‘Things have now calmed down and this year there has finally been a recognition that growth is cheap, which is one of the reasons we have [recently] performed much better.’

Life after Draghi

The picture is a little more nuanced than this, however. Two years of exceptional performance actually came to an end in July 2011, as world markets plunged on the eurozone crisis. This was a full year before Draghi pledged to support member state sovereigns with cash.

‘We also suffered from our mining exposure and a couple of special situations holdings in 2011 when we lost something like 7% [over the calendar year]. We have got rid of pretty much all of that now and have increased the overall level of quality across the funds,’ Slater says.

‘We held stocks, such as data centre manager CSF, where things have just been difficult for a long time, City of London Investment Group, Goldplat, Asian Plantations – those all cost us.

‘Over the last few years we have divested a lot of those. But mostly we were affected by a period when cyclicals were the only game
in town.’

A bright spot has been the company’s Income fund. Since launch in September the fund has returned almost 58% versus the IMA UK Equity Income sector peer average of 47%. That compares to 37% by Slater Growth and 16.1% by the Slater Recovery funds respectively.

While the fund has benefited from a run-up in prices, the mandate still yields 3.75% on a historic basis – and Slater is confident of this rising to plus 4% in the not too distant future.

The large disparities between the mandates is down to how the portfolio was designed ‘in response to what the people we were talking to ahead of the launch said they wanted – it is much more of a balanced mandate.'  

Income winners

While the top 10 holdings of the other two funds rarely feature companies familiar from the pages of the Sunday business supplements, a third of the income fund is devoted to FTSE 100 yield stocks, with a further third in the FTSE 250 and the balance lower down the market cap.

That is further subdivided into three stylistic categories.

‘We have growth companies, all offering a yield but probably less dynamic. Then we have lower price-to-earnings (P/E) growth stocks, which has some overlap with growth stocks like Cineworld, Photo-Me International and Marston’s Brewers. Then we have the dividend stalwarts, which offer good potential for steady earnings upgrades.’

The large cap section features the names you would expect – Vodafone, GlaxoSmithKline and Go Ahead. Thematically these are linked to a large holding in Reits, including the now rehabilitated Hansteen.

‘There is a degree of cyclical upside, but earnings are generally stable,’ Slater says.

Further down the cap weighting things get a little racier, with stocks such as Begbies Traynor, Braemar Shipping and Interserve. ‘Those are yielding something like 6%, which we are effectively we are being paid to wait. They are all at different stages, but they are not clearly growth stocks yet.’

 

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