However, star UK equity manager Mark Slater warns that finding a good IPO almost never happens and says he avoids piling into them in his MFM Slater Growth and MFM Slater Income funds.“We have a love/hate relationship with IPOs in that we hate them but love the occasional one,” he said.
“They tend to come to the market at a time that’s right for them, so the timing is rarely good. But you do get the occasional anomaly.”
Slater says his fund management process makes the vast majority of IPOs “easy to discard” because most of them don’t make money.
“We don’t invest in companies who don’t make money,” he said.
Slater says most IPOs come to market on multiples higher than they deserve and he says he would rather wait for the ratings to normalise before deciding whether or not to buy. The manager, whose father is legendary investor Jim Slater, says he never buys a company at a level above 20 times earnings because he doesn’t think the risk/reward profile is payable above that level.
Instead, he looks for companies with the potential for long-term growth, strong cash flows and visibility of earnings. If all the stars align, Slater says, those types of companies will also be trading on low multiples – a scenario he admits rarely happens.
Given the volatility in markets this year Slater says he has been more active than usual, trading out of a number of positions where he felt money had already been made.
“We’ve been more active than usual in harvesting profits,” he said. “The turnover in the portfolio is normally low but we have been more active on the buy side too.”
The manager sold completely out of Quindell after the stock’s share price soared at the start of the year.
From its highs in April, the stock is down an eye-watering 77.28 per cent.
Year-to-date performance of stock
Source: FE Analytics
“Quindell is a business based on legal loopholes so it’s not worth the high multiple of earnings,” he said.
“It was a nervous holding for us. We don’t like to have nervous holdings. We squeezed it in and it worked.”
Slater also sold some of his top holding, Hutchinson China, because it grew to a size too large to hold as a single position in the fund. He’s still backing the stock as a good long-term growth bet.
He has also exchanged some of his investment in Entertainment One in favour of Disney, which is says is growing at a remarkable rate given its size.
While the manager is generally positive about growth prospects in the market, he says things are getting more difficult for companies because the numbers are deteriorating quite quickly.
Profit warnings, for example, are back up to the level they were at three years ago in 2011 when markets were in a tight spot.
Slater has been operating under the belief that even if the economy recovers, it’s not going to feel great. He thinks a recovery is going to be tough for many years, which will test the mettle of even the most stable companies, which is why it’s important to ensure you’re not invested in the average firm.
The £131.5m MFM Slater Growth fund has been the best-performing fund in the IMA UK All Companies sector over the last 12 month, returning 17.56 per cent compared with a 1.53 per cent loss from its peers.
The FTSE All Share lost 0.32 per cent over the period.
Performance of fund, sector and index over 1yr
Source: FE Analytics
The mid cap biased Growth portfolio is also the top-performing fund in the sector over the last five years, with returns of nearly four times the FTSE All Share.
Since launch, the fund is up 236.87 per cent, more than double the returns of the sector and index, making it the second-best performing fund over that period behind the Franklin UK Mid Cap fund.
Performance of fund, sector and index since launch
Source: FE Analytics
The manager currently favours the telecommunications, media and technology sector, with 20.58 per cent of the portfolio invested in the sector. The next largest weightings are to services and pharmaceuticals at roughly 13 per cent each.
MFM Slater Growth has ongoing charges of 0.81 per cent.
The MFM Slater Income fund has a number of the same holdings as the Growth counterpart, but Slater aims to balance the fund more between companies he thinks are reasonably fast growing with high yields, cyclical firms and dividend stalwarts like Royal Dutch Shell and GlaxoSmithKline.
“It makes it quite difficult to shoot the lights out because it’s less racy than the growth fund,” he said.
However, the fund has outperformed its peers and the FTSE All Share since launch in September 2011, picking up 62.23 per cent compared to an average return of 48.86 per cent from the IMA UK Equity Income sector. The FTSE All Share made 44.9 per cent.
Slater Income is yielding 3.96 per cent, putting it roughly in the middle of the IMA UK Equity Income sector in terms of income.
