Slater Growth manager Mark Slater sits down with ii's Sam Benstead to discuss the opportunities in the UK stock market. He speaks about his investment approach, and highlights firms that have seen their share prices fall but are continuing to operate successfully, giving investors an opportunity to pick up a bargain.
Slater is the founder of Slater Investments and has been managing Slater Growth since 2005.
Sam Benstead, deputy collectives editor, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Mark Slater, manager of the Slater Growth fund. Mark, thank you very much for coming in.
Mark Slater, manager of the Slater Growth fund: A great pleasure.
Sam Benstead: We last had you in for an Insider Interview about two years ago. Back then, performance was going very well. But since about November 2021, performance has dropped off. Why is that?
Mark Slater: Performance in mid and small-cap UK has been incredibly weak in that period. The weakest I've ever seen it, actually, relative to other things in the UK and outside the UK. I think the change in the interest rate environment was the trigger. I'm surprised because, clearly, it wouldn't have surprised me at all if these companies, which you see in the United States on 50 or 100 times’ revenue, which don't make any money and won't make money for years, the idea that those would be destroyed price-wise wouldn't be surprising.
So, I'm hugely surprised by the extent of the de-rating in the UK in the area we operate. Again, I think it's partly fashion, it's partly outflows. It's obvious the interest rate environment has created alternatives, you know, gilts are suddenly very popular. It's clearly a short-term thing, but they're popular for now.
Annuities suddenly are interesting, so there's suddenly competition for money. The US has been on a tear [and] people always chase performance, so that will have attracted money. And then, of course, you get into this vicious circle where money comes out, prices go down, people have to sell, prices go down further. So, I think that really explains it.
There is fear of recession in most markets. That will affect, and has been affecting, some of the forecasts and it's been affecting some companies. But what's surprising to me is even those companies which haven't put a foot wrong, which are very unlikely to be affected by recession, they're treated pretty well the same as the others that might be affected. So, it's pretty indiscriminate. It's a very aggressive de-rating, more so than I think I've ever seen.
Sam Benstead: And can you give some examples of companies that, from a share price perspective, haven't performed well, but from a business operation perspective are doing great?
Mark Slater: Well, a company like Serco Group (LSE:SRP), which is one of our biggest holdings. It hasn't been terrible, the price action, but it just doesn't really move and that business is so much better than it was a few years ago. That’s on a 10% free cash-flow yield, so it's throwing off cash. They're retiring 6% of their equity per annum, they're cancelling it. It's trading on a price to earnings (PE) rating of about 10 or 11. It's growing at a much faster rate than that. And that's a company that is very unlikely to be affected by economic factors. It's got a very long-term order book. It's a very predictable business.
But there are lots of examples. It's hard for me to think of just one, there are so many. It's quite difficult to think of a really good example. It's almost a paradox of choice. There's lots and lots of companies in that category. Franchise Brands (LSE:FRAN), their shares are half what they were two years ago. They've done nothing wrong. They've always beat forecasts. They do all those things, Loungers (LSE:LGRS) similarly. But there's such a long list.
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Sam Benstead: And it's not a case of these shares were expensive before rates began to rise?
Mark Slater: In some cases they would have, but in many cases they were not. And these are not companies that were on crazy multiples of earnings. They were on normal multiples of earnings, but they've been beaten up very aggressively.
Sam Benstead: And during these difficult periods, what do you do as a fund manager? What actions have you taken?
Mark Slater: I think the most important thing is a philosophical one, which is to remind yourself that things get better, because they do. And it's very powerful, actually, because in the same way when markets were flying, people weren't really interested in risk and they assumed the good times would roll forever. But when things are more difficult, people assume that bad times will roll forever. And that's not true.
So, I think the most important thing is when prices are low, you've got to be on the front foot and you've got to be looking to buy. That's the most important thing. That's kind of it. I mean, yes, in a difficult environment you've got to stress-test your belief in what you own. There is more jeopardy in a complex world where demand has been slowing in some companies, some pockets. So, it's tough out there. But I think one has to be on the front foot.
Sam Benstead: So, lots of opportunities out there then. What have you been buying? What are you excited about?
Mark Slater: We've added to a lot of existing positions. And in a fast market - this has been a pretty fast market - our policy is normally initially to focus on existing holdings. We did a very similar thing in 2008. It was very difficult to forecast. There was lots of noise. So, we focused on the companies we knew best.
We've done the same in the last two years, so we've added materially to quite a large number of holdings in the fund, about 20. We're also beginning now to look to branch out and add new positions. The two instances of that recently have been Franchise Brands, which is a leading franchise business, first-class management, [it] is a magnificent business. Very good growth, low multiple, ticks every box for us.
And another is a company that is now called Team Internet Group (LSE:TIG). It used to be called CentralNic until quite recently. Again, they've never put a foot wrong. They're trading on seven times after-tax earnings now. Huge free cash-flow yield and growing very nicely. So, those are two relatively recent additions and I would expect that to be a good pipeline of additional ones. We very much feel that we should now be front foot forward and really being a little bit more proactive. So, we are looking to add new names.
Sam Benstead: Interest rates were the trigger for poor performance. Now that rates have plateaued and could maybe fall next year, could that be a catalyst for better performance?
Mark Slater: We don't get too hung up on the macroeconomics because it's very difficult to forecast. I mean, clearly, it was obvious that rates were going to go up. We didn't know how much. It's now pretty obvious that they are going to be at least at a sort-of more normal level than they were historically in the last 10 years or so. That has some impacts on businesses. But we're not trying to be too cute about macroeconomic forecasts.
Sam Benstead: In terms of sector forecasts then heading into 2024. Are there any areas of the market which you think are showing a lot of promise?
Mark Slater: Yes. I mean, again, we don't really operate on a sector basis. We end up with some sector concentrations, but that very much comes out of the companies we're looking at. So, our focus is very company specific. We're really very much focused on each individual business.
Sam Benstead: Can you give me a reason to be cheerful and a reason to be fearful as we head into the new year?
Mark Slater: It's perverse, actually, because although there are many problems in the world, I think the UK has been - particularly this part of the UK, small mid-cap - has been so beaten up that it's pretty immune, it's too strong. But it's taken a lot of its pain early. So, if there are problems elsewhere, which wouldn't surprise me at all, for instance, US tech, I'd be surprised if there wasn't a problem there.
This part of the market has been so beaten up. I think it's pretty resilient to bad news. Whereas on the other side, I think there's a lot of scope for upside now. The mood, I think, can only improve. You know, the pension funds are out of the UK. The insurance funds are basically out, they've gone. So, they can't do any more selling if they're not there anymore. They've basically gone.
The valuations are very low, which I think is a catalyst in and of itself. But on top of that, you've now got scope for government action. There's a cross-party view that the UK stock market has been neglected and needs a bit of help. And we've already had the Mansion House speech, which I think can benefit AIM.
There are other things that that are being kicked around, which could have a significant impact. But if you just look at historical performance after a negative year, historically, the numerous small companies index has gained 84% over the following three years. Similarly, when the small company group in the UK trades on under 10 times price earnings, you have historically had a 60% gain in two years. And the current PE multiple is under nine. So, it's very, very low. I think prices have got very low. And that makes it a much more interesting environment now.
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Sam Benstead: Are you seeing that optimism from companies buying back their own shares or director dealing trends at all?
Mark Slater: Director dealing is mixed. We've definitely seen quite a lot of buying, but there's also selling. And then you have to drill into why? Because a lot of options mature and they have to sell for tax reasons or what have you. But I think on the buyback side it's unequivocally changed, for the positive.
There are companies we own that have never done buybacks before, never even thought about it. But the valuations, and they're doing it for all the right reasons. They're doing it because their shares are cheap. I hate it when buybacks are sort of lumped in with dividends and companies say that ‘we're returning capital to shareholders’. These companies I'm talking about are doing it because their shares are cheap and it's the best way to allocate capital. So, to me, that's very positive.
Sam Benstead: Can you give an example?
Mark Slater: Next 15 Group (LSE:NFG) is a company we've owned for about 15 years. It's acquisitive, they do bolt-on acquisitions. They're not aggressively acquisitive. They've announced a buyback programme quite recently. Future (LSE:FUTR) have announced a buyback programme as well. Serco, I mentioned earlier, they haven't done it before. They're now doing it because their shares are very cheap. So, it's the right kind of buyback. That's what I like. It's thought through. It's targeted.
Sam Benstead: Finally, the question we ask all our guests Do you personally invest in your fund?
Mark Slater: Very much so. I have a 10-digit* amount of money invested in the fund, and I've always invested in it. I add each year to the investment, and I very much eat my own cooking.
Sam Benstead: Mark, thank you very much for coming in.
Mark Slater: Thank you.
Sam Benstead: And that's all we've got time for. You can check out more Insider Interviews on our YouTube channel where you can like, comment and subscribe. See you next time.
*This refers to 10 digits including two zeros after a decimal point.
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