MFM Slater Income Fund research update

Mark Dampier | Tue 23 June 2015

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We recently met Mark Slater for an update on his MFM Slater Income and MFM Slater Growth funds. The former is a smaller fund and has a shorter track record than the latter, so it tends to receive less publicity. That said, I feel it should not necessarily be ignored.

Since the fund's launch in September 2011, it has returned 87%* against 63.3% for the FTSE All Share index, although this should not be seen as a guide to its future performance. The fund has also tended to offer some resilience in a falling market, while almost keeping pace with a rising market. Furthermore it has demonstrated lower volatility than the broader market.

Past performance is not a guide to future returns. Full year past performance data before 2012 is unavailable. Source: Lipper IM* to 01/06/2015

Mark Slater is first and foremost a stock picker. He spends little time focusing on wider economic issues. I tend to favour this approach as I feel investors often spend too much time concerning themselves with economic news. Yet many of these stories are filled with doom and gloom, putting off any investment in the first place.

The fund invests in three broad categories. Mark Slater believes this aids the fund in keeping its volatility relatively low - while companies in one group could be going through a tougher time, the hope is that one or both of the other categories is performing well.

The first category consists of growth-orientated stocks that also offer a good yield. This portion of the fund includes a broad spectrum of companies - examples include 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 (Real Estate Investment Trusts) have recently stood out performance-wise, along with companies including Standard Life, Laura Ashley and Phoenix Insurance.

The final category contains more economically-sensitive firms, some of which tend not to be growing their earnings. These companies may have experienced short-term difficulties, but Mark 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.

Not everything in the portfolio has, however, been a success. Over the past year, positions in Royal Dutch Shell and John Menzies have disappointed, for example.

After a strong run for the fund and the UK stock market, I asked the manager whether he is still able to find new opportunities. As a genuine stock picker, if he is not able to identify new ideas then it is often a sign of an overbought or an overvalued stock 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 is perhaps unsurprising given the low interest rates currently available on cash, meaning some investors are forgoing the security of cash and are turning to the market in search of alternative income opportunities.

According to the manager, this has also meant that many IPOs (Initial Public Offerings) of low-quality companies have been extremely popular simply because they offer a high yield. Yet a headline high yield is no good unless it is sustainable and higher yields often mean higher risks. In his view, 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 investable opportunities.

This fund invests in companies of all sizes, with a bias towards higher-risk smaller companies, including AIM-listed stocks (junior members of the London Stock Exchange). We discussed AIM given it has recently reached its 20th anniversary and, interestingly, while the manager believes it contains some wonderful gems, he views a lot of this universe as un-investable.

Our view on this fund

Presently the fund is yielding 3.56%, although this is variable and not guaranteed. Many income investors focus their portfolios on the behemoths of the UK Equity Income sector, which tend to have a bias towards larger companies. We believe a fund such as this, which also invests in higher-risk small and medium-sized companies could provide some useful diversification.

While Mark Slater has delivered a good performance on this fund so far, his track record in managing an income mandate is relatively short compared with many other managers in this sector with considerably longer track records. The fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors.

Please note the fund's charges can be taken from capital, which can increase the yield but reduce the potential for capital growth.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.