The £92m fund has been one of the major beneficiaries of the recent rally and is the third-best performing portfolio in the IMA UK All Companies sector over the last 12 months, with returns of 35.24 per cent.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
However, the manager has sold out of some of his best-performing stocks and has decided to leave those profits un-invested for the time being, as he says the UK market is looking slightly toppy.
“As we stand right now, given that some of our recent sales and as we have been fortunate to see some inflows, we have built up our level of cash,” Slater said.
“We are comfortable with that because we think there will be good opportunities to buy well over the next few months.”“There is bound to be a correction at some point. We are long overdue one, but that is healthy and normal.”
“We have come out of a very good year for equities and this year has started very well as well, so I think the market is starting to look slightly stretched. I would say it is definitely harder to find good things to buy than it has been in the past.”
“But, as we are still adding names to the fund, it shows that things aren’t ridiculously bad,” he added.
Slater recently told FE Trustnet that he had made a number of changes to his Growth fund.
He has trimmed his holding in Entertainment One and sold completely out of Diploma, but has added other companies such as Communisis.
Mears Group, which is listed on the FTSE Small Cap index, is another one of his recent acquisitions.
The stock has already performed well with returns of close to 40 per cent over the last 12 months, but with a P/E of around 10 times earnings, Slater says it still has legs.
“Mears is a support services company and one of the last men standing in the social housing sector,” Slater explained.
“It’s still a growth market and Mears is very well positioned to benefit. It has good turnover, high visibility of earnings, good margins and has high returns on capital. It is also trading on a very reasonable multiple.”
Nevertheless, Slater says that there aren’t many opportunities like Mears left in the market.
A number of managers – such as Investec’s Alastair Mundy – have warned that the UK market is looking overvalued.
They say that there has been a rough recovery stage and that the recent stellar equity returns have largely been driven by multiples expansion, with investors bidding up share prices.
However, they warn that this sort of re-rating is very unlikely to happen again and therefore company earnings – which have so far been muted – will have to drive the market.
As a result, they warn investors that returns from the UK market are likely to be much more flat than they have been over the last few years.
Performance of index over 5yrs
Source: FE Analytics
Slater agrees that earnings will be the focal point in 2014 and because of that says investors should be upping their exposure to growth companies.
“The beauty of growth companies is that, as long as earnings are coming through at a reliable pace and you get in at the right price, time is your friend. These companies should already be growing their earnings, so the share prices should look after themselves.”
“We don’t try and guess market levels, but even if we felt the market was about to fall 10 per cent, we wouldn’t sell all of our holdings because it is so hard to buy back into good businesses like that.”
The manager describes investing in good growth companies as like trying to hold an inflated beach ball underwater, because while it may underperform for a period of time, it will inevitably rise up at some stage.
Slater, who also manages the MFM Slater Recovery and MFM Slater Income funds, launched his Growth fund in March 2005.
According to FE Analytics, MFM Slater Growth has been the third best-performing portfolio in the IMA UK All Companies sector since its launch, with returns of 239.02 per cent.
As a point of comparison, the FTSE All Share has returned 96.34 per cent over that time.
Performance of fund vs sector and index since Mar 2005
Source: FE Analytics
The fund is also one of the sector’s best-performing funds over three, five and seven years.
It has been a top-quartile performer in five out of the eight discrete calendar years since its launch, although it did underperform the sector in 2007, 2008 and 2012.
Slater says that the major reason why his Growth fund underperformed in 2012 – and the early months of 2013 – was due to the aggressive nature of the cyclical rally, with investors feeling more confident taking higher risk.
However, since the May/June sell off, investors have had a different mentality. Because of that, he thinks the cyclical rally is likely to pause.
“Since June and July, there has been no radical change in company prospects. However, cyclicals have calmed down as investors are now waiting for earnings growth to come through, which does need to happen,” Slater said.
“With growth companies, it is already happening and you can see them coming through. However, when it comes to cyclical stocks it is all about results day.”
The manager’s MFM Slater Growth fund’s clean share class has an ongoing charges figure (OCF) of 0.81 per cent.
