Mid caps saw a steep sell-off at the start of the year, and are down year-to-date versus their larger counterparts.
Year-to-date performance of indices
Source: FE Analytics
“In February we saw a strong shakeout in the small and mid cap space. It was fairly dramatic,” Slater (pictured) said. “But markets have calmed down a bit over the last month or so.
He adds that the recent underperformance of mid and smaller companies is not indicative of a wider shift to large cap outperformance, but a natural short-term correction. The manager says mid caps will continue to outperform, just as they have done in recent years.
“[The situation] is not just a switch between small and big companies. Large caps have been left behind, but they’ve been left behind for a reason. They’re not very interesting,” he said.
“The FTSE 100 has horribly underperformed [small and mid caps] over the long-term. It will always horribly underperform over the long-term. It has to.”
“The real issue was just a correction that was long overdue. [Mid caps] hadn’t had a correction in a while. It needed to happen. It’s more that than a switch to large caps.”
Slater has been adding to a lot of existing holdings in his MFM Slater Growth and MFM Slater Income portfolios and bought a number of new stocks, as he says the sell-off made them more attractive from a valuation perspective.
He has taken the opportunity to increase holdings in the FTSE 100 and FTSE 250 in his Slater Income fund, including positions in HSBC, UK construction giant Galliford Try, Royal Dutch Shell, event management company Motivcom and public-transport provider Go-Ahead Group.
He has also added to oil and gas producer Amerisur Resources, British housebuilder Redrow and financial services group Close Brothers in the Slater Growth fund.
The manager says February’s shakeout led to him buying online advertising firm Marimedia and Patisserie Valerie in the Growth fund, both at IPO. He has also added housebuilder Bellway and insurer Randall & Quilter to the Income fund.
“When we can find new names, we’re very happy,” Slater said. “We’ve also been recycling money into cheaper situations, which we think makes good sense. We don’t own stocks on stratospheric multiples. We never have.”
In spite of the amount of buying activity recently, Slater says he doesn’t trade very much in his portfolios, which is one of the reasons he is able to keep fees comparatively low on the funds.
“It’s intelligent activity rather than making brokers rich for the sake of it,” he said. “We’re not going to buy something for 10 per cent [upside]. That’s not a very good reason to buy. We’re prepared to wait and make 50 to 100 per cent over three to five years.”
Across the board, Slater’s portfolios have topped the performance tables since the start of the year, as highlighted in a previous FE Trustnet article.
The MFM Slater Growth portfolio is a standout performer over the mid-term, having returned 259.69 per cent over five years. The IMA UK All Companies sector made just 98.05 per cent over the period.
It is up 37.05 per cent over the last 12 months, making it the best performing fund in a sector that made just 13.32 per cent. Although the fund is benchmarked against the sector, as a point of comparison, the FTSE All Share picked up 11.7 per cent over the same period.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
The MFM Slater Income fund made 22.76 per cent over the past year while the IMA UK Equity Income sector made 14.22 per cent.
The fund is up 65.09 per cent since launch in September 2011, beating the sector by nearly 10 percentage points. The FTSE All Share made 51.48 per cent in this time, according to FE Analytics.
Performance of fund vs sector and index since Sep 2011
Source: FE Analytics
The fund’s performance is constrained somewhat by a need to deliver yield, but it is one of the best in the sector on that level too, paying out 4.43 per cent.
“We’re not looking to shoot the lights out in this fund,” Slater said.
Instead, the manager splits the portfolio in to three types of stocks – growth, dividend stalwarts, and more cyclical companies.
He has the added flexibility of being able to invest across the market cap spectrum, holding large dividend-paying companies such as AstraZeneca alongside more cyclical names such as First Group and global recruitment firm Harvey Nash.
The Slater Growth portfolio has ongoing charges of 0.81 per cent while the Slater Income fund charges 0.84 per cent.
