Ahead of the coalition government's Comprehensive Spending Review, due to be announced this afternoon, I spoke with Mark Slater, CIO of Slater Investments and manager of the MFM Slater Growth fund, which invests in UK equities, about the impact of the cuts, his favourite portfolio holdings, and the role of his fund in a diversified portfolio.
Holly Cook: Are you concerned about the impact of soon-to-be-announced public spending cuts on UK equities?
Mark Slater: It will no doubt be bad news for some companies, though much of the bad news has been well advertised so I doubt there will be too many surprises. For our companies, however, I do not expect any material impact. We have been careful to avoid businesses operating in areas which are exposed to problem areas like lower government spending, bank deleveraging, consumer pressures, etc. Our companies operate in growing niches or fast growing markets.
Cook: Could you give an example of a stock that you're particularly excited about at present?
Slater: Our two largest holdings are Cape and Hutchison China MediTech. Cape is a market leader in non-mechanical industrial services, primarily in the oil and gas industry. They are strongly positioned to benefit from the huge wave of projects underway or about to start in the Pacific Rim. They also have good market share in the Gulf and the UK. The business has a wonderful safety record and deep relationships with the majors. Maintenance represents 50% of turnover giving a strong underpinning to forecasts. Despite a very strong share price performance the stock trades on a still modest P/E of 8, compared with the 15% per annum earnings growth we expect over the coming five years. (Indeed, management needs to beat this compound target to get their bonuses). The P/E is also modest compared with the sector and the market average despite the business boasting better growth than most and far greater reliability during the crisis. Cash flows are strong and debt will be zero by the end of next year.
Hutchison’s core business is a leading Chinese healthcare business with strong brands and a great distribution network, growing revenues at 20% per annum. We expect this to continue for many years to come, driven by the State programmes to provide better healthcare to urban workers. 20% turnover growth translates into much higher earnings growth rates. Assuming the company’s other assets have zero value, the core healthcare business is trading on a far lower rating than its Chinese or Hong Kong quoted peers and on a modest P/E in relation to the growth rate. However, the company’s other operations are in fact very valuable--it has net cash, 100% of a leading drug R&D business and an organic foods business with great brands that is likely to be a major force in the coming years. Its branded organic infant baby milk product has just been launched and is likely to be a big hit.
Cook: What role do you see your fund playing as part of an individual's diversified portfolio?
Slater: I see the MFM Slater Growth Fund as a core long term holding for any UK investor. Our objective is long term capital growth. Our focus on those rare dynamic growth companies that can perform even in difficult conditions has paid off very well in the past year and we still see plenty of scope for further gains. Markets are likely to remain treacherous and volatile for many years so this kind of approach--ultra focused on niche, undervalued businesses away from the problem areas--is relatively low risk while offering substantial upside. We have a very disciplined and uncompromising investment approach with a very robust focus on protecting the downside. In addition, we have large investments in the fund (indeed, in all of our funds) so we are totally aligned with investors.
