Mark Dampier: Blocking out the economic noise


I recently met Mark Slater for an update on his MFM Slater Income and MFM Slater Growth funds. The former has a considerably shorter track record than the latter, so it tends to receive less publicity.

Since I last saw Slater in October, the Income fund has grown by an impressive 16.6 per cent, with dividends reinvested, compared with 11.3 per cent for the FTSE All Share index. Further still, it has returned 87 per cent since launch in September 2011, against 63.3 per cent for the index. Encouragingly, it has tended to offer some resilience in a falling market, while almost keeping pace with a rising market. It has also demonstrated lower volatility than the market.

Slater is first and foremost a stock picker, who spends little time focusing on wider economic issues. Private investors could learn a lesson here: many spend too much time concerning themselves with news in the financial press.

Yet many of the stories are filled with doom and gloom,  only serving the purpose of putting people off investing at all.

The Income fund invests in three broad categories. This helps to keep its volatility relatively low: while companies in one group could be going through a tougher time, the hope is one of the other categories is performing well.

The first category consists of growth-oriented stocks that also offer a good yield. This portion of the fund includes a broad spectrum of companies, such as Amino Technologies, Booker Group and Provident Financial.

The second element comprises ‘dividend stalwarts’. These companies tend to offer respectable yields and their earnings are improving or heading in an upwards trend. Here, Reits have recently stood out performance-wise, along with companies such as Standard Life, Laura Ashley and Phoenix Insurance.

Finally, there is the cyclical category, containing more economically-sensitive firms. These companies may have experienced short-term difficulties but Slater sees improvement on the horizon and is happy collecting decent dividends in the meantime. This includes house builders such as Bellway and Galliford Try.

However, not everything in the portfolio has been a success. Over the past year, positions in Royal Dutch Shell and John Menzies have been disappointing, for example.

After a strong run for the fund and the UK market, I asked Slater whether he is still able to find new opportunities. As a genuine stock picker, if he is not able to identify new ideas, it is often a sign of an overbought or overvalued market.

In his view, higher-yielding companies are currently trading on higher valuations than low-yielding stocks, which has historically not been the norm. This isn’t surprising given the near-zero interest rates available on cash, meaning some savers are turning to the market in search of alternative income.

It has also meant many IPOs of low-quality companies have been popular simply because they offer a high yield. A headline high yield is no good unless it is sustainable, however. According to Slater, the current environment is not as easy as it once was for investing for income, but overall he remains reasonably upbeat and is still able to identify plenty of new opportunities.

Similar to the Growth fund, the Income fund invests in companies of all sizes, with a bias towards smaller companies, including Aim-listed stocks. But while the manager believes Aimcontains some wonderful gems, he warns it is largely an index full of “toxic waste”.

The fund is currently yielding 3.6 per cent on a historic basis, although Slater anticipates its prospective yield is around 4.2 per cent. For those investors who have focused their income portfolios on the largest behemoths of the UK Equity Income sector, such as the CF Woodford Equity Income and Artemis Income funds, the MFM Slater Income Fund could be a worthy dovetail.

Mark Dampier is head of research at Hargreaves Lansdown