This week I return to a fund I highlighted in June last year – the MFM Slater Growth Fund which is managed by Mark Slater.
At that point, the fund had endured a difficult 18 months and I suspect many anxious investors sold their holding. However, periods of underperformance from truly active fund managers should be expected. If you want to beat the relevant benchmark over the long term, you must be brave and stick to your guns.
I reported last year that Mr Slater thought the fund was ripe for a recovery. His timing was spot on. Since then, its performance has been nothing short of spectacular, rising 37.6 per cent against 6.3 per cent for the benchmark, the FTSE All Share index.
When buying a fund, it is important to understand the manager's underlying philosophy, so that weaker periods do not come as a shock. If you hold conviction in the manager's approach, you are more likely to hold on and wait for the turnaround after a tough patch. The MFM Slater Growth Fund is a case in point.
Its weak performance during 2012 and the first half of 2013 could largely be explained by three factors. June 2013 marked the end of a short, but powerful, cyclical rally. This did not suit Mr Slater's style. He tends to avoid highly economically-sensitive sectors such as financials, which were in vogue at the time. Instead he focuses on companies which can grow through self-help measures.
Secondly, an unusually high number of the fund's holdings issued profit warnings during this period, which caused their shares to fall sharply.
Thirdly, Mr Slater felt that while a number of holdings were performing well, this wasn't being reflected in their share prices. Since then investors have become focused on company fundamentals, providing an improved backdrop for the fund. More importantly, most companies in the portfolio have performed well and their shares have risen substantially.
The fund's largest holding, Hutchinson China Meditech, has enjoyed an excellent year following a string of positive announcements from the Chinese-based healthcare group. The manager continues to hold the shares, which he believes offer excellent value. Other successes include Entertainment One, Restore and Judges Scientific.
In light of the fund's recent strong performance, Mr Slater has rebalanced the portfolio. He has taken profits from some of his best performers, including Entertainment One. He has sold out of others, including Judges Scientific.
Proceeds have been reallocated to existing holdings such as First Derivatives, a leading provider of software and consulting services to the capital-markets sector. The manager views its current valuation as undemanding – its share price fell sharply earlier this year amid the smaller companies sell off, yet it maintains strong growth prospects.
Over a dozen new names have been added to the portfolio this year, such as Skyepharma and pub group Marston's. This is unusual as portfolio turnover is generally quite low. However, Mr Slater saw the recent market correction as a buying opportunity.
Many of the companies held are in niche, growth areas. They tend to exist in their own microclimate, meaning the wider economy does not necessarily directly affect them. That said, the fund's performance does tend to go in fits and bursts. This is partly due to the news flow coming from companies within the portfolio, and also because the fund invests almost entirely in small and medium-sized businesses, which are more volatile than their larger counterparts.
If you are an investor in this fund, it is imperative you have a conviction in the fund manager so that you are not disillusioned in the down periods.
Investors who have stayed the course should be happy with the results. Over the past five years, the fund has risen 217.3 per cent, while it has returned an impressive 259.6 per cent since launch in 2005. This compares favourably to the respective return of 60.1 per cent and 98.4 per cent for the FTSE All Share index.
As always, this is no guide to the future. However, I believe adventurous investors who are prepared to hold for the long term will be rewarded.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit www.hl.co.ukReuse content