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Mark Slater: Rotation, what rotation?

29 September 2014

The manager of the MFM Slater Growth fund doubts the consensus view that large caps’ outperformance of smaller caps has legs.

By Daniel Lanyon,

Senior Reporter, FE Trustnet

What is commonly regarded as wholesale rotation out of small and mid-caps in March 2014 was in fact a temporary wobble , according to FE Alpha Manager Mark Slater, who says the rallying of small and mid-cap companies has much further to go.

ALT_TAG Smaller companies had been rapidly outperforming larger caps for several years until the market sold off at the beginning of March.

According to FE Analytics, the FTSE 250 and FTSE Small Cap indices have lost 6.26 and 3.13 per cent while the FTSE 100 has been broadly flat since 1 March 2014.

Performance of indices since 1 Mar

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Source: FE Analytics


The two indices rose at almost triple the rate of the FTSE 100 in 2012 and almost double in 2013.

Slater, who runs the MFM Slater Growth, MFM Slater Income and MFM Slater Recovery funds, says the recent underperformance of smaller companies was caused by market panic and profit taking rather than a secular shift in equity markets.

“I don't think there was an actual switch. I think there were people thinking they ought to switch. What happened was a lot of small and mid-cap stocks - and tech as well - had run too high and just corrected but did it very quickly,” he said.

“At the same time some of the large caps went up and some of them stayed the same. It wasn't that a lot of money went into them and drove their prices up.”

“Now, a lot of the small and mid-cap names have recovered. I think it was a hold up but not a switch [for the market].”

“Small and mid-caps had done better than large caps for a period of time and whenever that happens there is profit to be taken.”

“Whenever there is a wobble in the psychology of the markets, people put taking profits first so you get gyrations but I don't think unless the prospects for larger companies improve then there will be much of a switch.”

Although FTSE 100 stocks are looking cheaper on average there are few names in the index that combine attractive valuations with good growth prospects, Slater says.

“You have got to compare price with growth. We found out that one of the big fund groups spent the summer dumping small caps via a directive from on high and they got taken to the cleaners by this.”


“We invest in small and medium-sized companies because that is where you get the valuation - that is where the most profitable companies are. ”

“But we don't have to do that, we are totally free to invest where we like [in terms of size]. We can be 100 per cent FTSE 100 if valuations are supportive. The question is whether we want to.”

“Yes, FTSE 100 stocks in general are on a lower P/E and a higher yield than mid and small caps but they are not growing. So, I would say valuations are pretty fair. A lot of these companies are going nowhere.”

“The large companies with reasonably decent growth prospects are very highly rated so the average P/E is low because of the stodgier more boring companies.”

“You take a look at Diageo, Bunzl, anything that is growing reasonably fast - they are all on 18 to 20 times earnings. These are fantastic businesses but you have to pay for them.”

Slater holds a mixture of large, small and mid-caps across his three funds although there is an apparent bias to mid and small caps with names such as Hutchison China MediTech, Restore and NCC sitting next to Disney appearing in the top holdings of the £126m MFM Slater Growth fund.

Over three years the fund has returned 64.61 per cent compared to an IMA UK All Companies sector average of 53.11 and a gain in the FTSE All Share of 49.44 per cent.

Performance of fund, sector and index over 3yrs

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Source: FE Analytics


The two indices rose at almost triple the rate of the FTSE 100 in 2012 and almost double in 2013.

Despite the bias, the fund has also beaten the sector and index since the sell-off in March.

Performance of fund, sector and index since 1 March 2014


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Source: FE Analytics



The two indices rose at almost triple the rate of the FTSE 100 in 2012 and almost double in 2013.

Slater says a serious valuation bounce could trigger a secular switch into large caps but he doesn’t see that as likely in the near term.

“I still think the growth rates in the mid and small cap arena are very superior. There is some pressure in the mid cap space that we have seen in results. Much of it is due to the level of sterling; that hurt badly but it is coming back and sorting itself out.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.