Slater, who manages the top performing £80m MFM Slater Growth fund, invests in stocks that demonstrate good earnings, but whose growth is underestimated by the market.He says that while cyclical, or recovery, stocks had led the market in 2012 and the early months of 2013, since the May/June sell-off investors have been happier buying companies that are already delivering earnings growth.
This has benefited his style and as a result, his fund is the second-best performing portfolio in the IMA UK All Companies sector over one year with returns of 39.89 per cent.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
However, while the manager says he is still finding opportunities and is therefore fully invested, the rally has meant that many of the companies he would usually invest in have now become quite expensive.
With this in mind, Slater tells FE Trustnet which stocks he has recently bought, trimmed his holding in and sold out of completely.
Buy – Communisis
Slater has recently been buying shares in the marketing services business Communisis, which is listed on the FTSE Small Cap with a market cap of just £134m.
The company itself helps its clients with customer communications.
“They have spent a lot of money developing a competitive edge,” Slater said.
“They have recently gained a number of long-term contracts with large companies such as Lloyds, where it will be looking after its marketing needs by taking over its in-house printing operations.”
“Communisis is a very well-run business with a good management team. It is trading at just 10 times earnings; it has a very strong balance sheet and is giving us a nice yield. It’s not the highest quality company in the world, but it’s got the wind behind it.”
Slater added: “It’s clearly in the growth phase of its cycle.”
Investors in Communisis have generally been well rewarded over recent years. According to FE Analytics, the stock has returned 32.78 per cent over one year, beating the wider market.
Performance of stock vs index over 1yr
Source: FE Analytics
However, as the graph above shows, Communisis’ share price has sold off recently and the stock has lost 8 per cent over the last month.
Our data shows that Cavendish Opportunities and Henderson UK & Irish Smaller Companies are the only two funds in the IMA universe that count Communisis as a top-10 holding.
Slater has also recently bought shares support services companies Mears Group and Regus.
Trim – Entertainment One
Slater has been a long-term fan of FTSE 250 company Entertainment One and even tipped it to outperform in an FE Trustnet article back in April 2011.
The £1bn company is renowned for owning the likes of childrens television franchise Peppa Pig and the Twilight film saga.
The stock has returned a stellar 83 per cent over the last 12 months, which is more than 65 per cent higher than the return of the FTSE 250.
The manager held more than 10 per cent of his MFM Slater Growth fund in the stock last year.
However, while he is still a shareholder in Entertainment One, he has decided to top-slice his position in it following a period of strong performance.
“We have taken profits from certain names, especially ones which are now trading on much higher multiples,” Slater explained.
“One example of this is Entertainment One, which we have brought down to about 3.5 per cent of the fund. It still looks good at 17 times in my opinion, but it looked a lot better at 10 times. I wouldn’t say it was a value play anymore, though I still think it is one of the best growth companies in the FTSE 250,” he added.
There were 10 funds, as of last month’s factsheet, that counted Entertainment One as a top-10 holding.
They included Cazenove UK Absolute Dynamic, Unicorn Free Spirit, City Financial UK Opportunities and Investec UK Smaller Companies.
Sell – Diploma
While Slater has only trimmed his exposure to Entertainment One, he has exited his position in Diploma, which supplies specialised products such as hydraulic seals to the construction industry.
Simon Moon, manager of the Unicorn UK Smaller Companies fund, told FE Trustnet last year that it was a good company to play the economic recovery in the US as Diploma generates a large proportion of its earnings from across the Atlantic.
Performance of stock vs index over 5yrs
Source: FE Analytics
Shareholders in the FTSE 250 company have seen almost uninterrupted gains over the last five years and Slater says that, as a result, investors would be better off looking to deploy their capital elsewhere.
“Diploma is a company that we had held in the portfolio for a very long time; however, its share price has become pretty high,” Slater said.
“It’s now trading on a multiple of 23 times. We have a huge amount of time for the management and hold them in the highest regard; however I think at its current valuation, now is a good time to move on.”
The manager added: “Saying that, I would be very happy to buy it back one day when it is cheaper.”
Baillie Gifford British Smaller Companies, Invesco Perpetual UK Smaller Companies Equity, Royal London UK Smaller Companies and Schroder UK Smaller Companies are the only four funds that count the £900m company as a top-10 holding.
