[Commentary] Slater Growth Fund – Annual Report for the year to 31st December 2020

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Six months

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Since launch*

Slater Growth Fund P unit class






Investment Association (IA) OE UK All Companies






*A unit class launch 30 March 2005

Past performance is not necessarily a guide to the future. The value of your investment can go down as well as up; you could receive back less than you have invested.

After a roller coaster ride with some wild swings and ups and downs the portfolio finished the period by delivering a solid overall double-digit gain. As our motto says: “Our ability is your stability.”

Initially, 2020 looked like it was set up for good run after the election of a large Conservative majority on 12 December 2019. This eliminated the risk of a Marxist-inspired government, allowing investors to get back to their proper task of allocating capital efficiently without worrying about confiscation and capital flight.

However, from late February 2020 it was all change again as the Covid-19 pandemic took hold and global stock markets experienced extreme volatility. The United Kingdom (UK) Large Cap index fell over 23% between 21 February 2020 and 31 March 2020. The UK Mid Cap and AIM indexes both fell 30% over that time. At their lows during March 2020 they were down over 40%. Moves at this speed had not been seen since October 1987. The rout spread to many markets, not least crude oil, and bonds swung wildly.

Our first priority during the crisis was to focus on the survivability of our holdings. We also took the view that businesses that generated consistently good returns on capital before the crisis were likely to perform well afterwards. The uncertainties of the virus and lockdown, however, made it exceptionally hard to predict the near term, so we found it more productive to assess the situation three years into the future. It was tempting to buy
heavily at that stage because everything looked ‘cheap’. However, we were careful to balance risk and reward and initially focused on adding to high conviction holdings.

The second calendar quarter of 2020 saw a strong recovery in the market as the panic subsided. There was an increased level of activity during the quarter as we sought to capitalise on the turmoil with four new additions to the Fund, the topping up of 14 existing holdings and the sale of one. A further holding was the subject of a takeover.

The third calendar quarter of 2020 was mixed. The major indices had a poor time, led by a 5% fall in the main UK market. The 4.5% rise in sterling against the dollar was a major headwind. Mid-cap companies were also sluggish, but growth companies performed well.

The fourth calendar quarter of 2020 performance, however, was stellar. Many stock markets rose by more in November 2020 than they typically deliver in a whole year. The astonishingly good vaccine news allowed investors to start to turn the page at last.

As discussed in more detail below, during the year we saw some stellar individual performances from our growth companies, with a small number of the Fund’s holdings up by 100% or more, including Jet2 (formerly Dart Group), up 148%, Ergomed, up 168%, and Codemasters, up 133%.

During the period there were 12 major contributors of +0.40% or more and 8 major detractors of -0.40% or more.

The star performer was video games developer Codemasters, which contributed +3.84% after gaining +133%. Strong trading in the 2021 half year benefited from the launch of high-quality racing games, in particular the earliest ever release of Formula 1 (F1) 2020. Other title releases included Fast & Furious Crossroads, Project CARS 3 and its back catalogue of games, including F1 2019 and DiRT Rally 2.0. F1 2020 sales ‘materially over-performed versus the previous year’ and the franchise remains at the heart of the business. DIRT 5 was also released on the next generation of Xbox Series X/S and PlayStation 5 consoles. The investment case for owning Codemasters rests on the powerful tailwinds for greater games consumption, whether downloaded or streamed, plus the potential from mobile gaming. F1 is an evergreen franchise and Codemasters has become a world-leading independent studio for racing games. This clearly caught the attention of Take-Two Interactive Software. In November 2020 Codemasters’s shares rose sharply after it received a combined cash and shares bid from this quoted United States (US) competitor. The share price subsequently rose above this valuation as the market anticipated it fell short of fair value. In mid December 2020, Codemasters’s shares rose materially a second time after another industry player tabled a higher all-cash offer.

Pharma services company Ergomed contributed +2.03% and rose +168%. The company shrugged off the impact of the pandemic. First half revenues to September 2020 rose 15% and the order book grew 28% year-on-year, reflecting strong sales momentum across the business. In January 2020, the company acquired the US pharmacovigilance (PV) business of UDG for a bargain $10 million. The deal gave critical mass in the US, where regional sales rose 79%. PV sales rose 62% and now account for c. 64% of the group. Ergomed’s other division, a provider of clinical trial services with strengths in rare and orphan diseases, saw underlying service fee revenue decline 6.7%. Some delays to clinical trials were to be expected owing to restricted access to hospitals. However, the company has an innovative operating model which enables patients to take part in trials at home rather than in a hospital. Ergomed has ambitions to expand clinical services, believing that previous rounds of consolidation have created a gap in the mid-market. Ergomed offers investors a high growth, high margin, lower risk way to gain exposure to the sharp increase in drug development and biotech innovation that has accelerated amidst the pandemic. The company remains well-placed to drive further gains through underlying growth and selective mergers and acquisitions (M&A). In December 2020 it bought MedSource, a full-service clinical research organisation (CRO) specialising in oncology and rare diseases, boosting its US presence in what is an immediately accretive deal.

Future contributed +1.50% after gaining +20%. The company’s competitive edge comes from its unique, proprietary ‘media intent’ technology platform. This enables the business to pursue the onboarding of declining magazine titles and scale their content profitably online. As demonstrated by the full year results to September 2020 this in turn helped deliver results ahead of expectations, which led to broker upgrades. The strategic rationale of converting specialist, niche magazine brands to digital remains compelling. During the reporting period, the company delivered record results ahead of expectations. Group revenue rose 53% underpinned by 23% organic revenue growth from its Media division. This in turn was fuelled by online organic audience growth of 48% and ecommerce revenue growth of 58%. These positive factors more than offset declines elsewhere. The company is turning profits into cash as evidenced by the 79% rise in adjusted free cash flow, validating the model. In November 2020 Future made a recommended offer for the price comparison specialist GoCo. We believe that this will accelerate the company’s growth, substantially increase its addressable market, and create lucrative adjacent routes to monetisation, adding to the already attractive growth story.

Marketing automation specialist dotDigital contributed +1.24% after gaining +65%. The pandemic has only had a ‘minimal impact’ on the company, in large part because 91% of its revenues are recurring. In finals to June 2020 organic revenue growth increased to 12%. International revenues grew 20% and now account for 31% of the total. Functionality revenue increased 16% to reach 36% of recurring revenues, demonstrating how the core platform is attracting a higher end, stickier customer. 23% of clients now take more than one service, for example, online chat or SMS in addition to email. The company has demonstrable pricing power with average revenue per user increasing 12% to break through the £1,000 per month barrier for the first time. The pandemic has accelerated the adoption of email and omnichannel marketing as companies seek to engage customers at every touch point along their consumer journey. High return on investment suggests that usage of marketing automation platforms is not only here to stay but likely to increase. dotDigital has a strong industry tailwind and occupies a ‘sweet spot’ with its market leading solution in a ‘hot’ sector which is seeing elevated M&A activity.

Gamesys contributed +1.10% after rising +61%. The third quarter to September 2020 saw a continuation of the trends seen in the first half with pro-forma revenues, post the merger between Gamesys and Jackpot Joy, up by 31% to £190 million. This was ahead of management of expectations. Revenues in Asia increased by a high double-digits percentage. Japan has emerged as its second biggest market, helped by the launch of Intercasino, a second brand. Spain continued to make good progress in the third quarter of 2020, with ‘Monopoly Casino’ proving to be one of the most successful new brand initiatives in the history of the company. The US maintained good momentum with healthy double-digit top line growth albeit operations there are currently tiny, mainly because liberalisation is being led by sports betting. Online gaming will follow state by state and the company is currently partnered with Caesar’s Palace. The company has made a good start to fourth quarter to December 2020. Net debt is expected to close the year at little over £300 million and be well below £100 million by December 2022. Deleveraging continues apace. Gamesys is a formidable cash machine which should support a progressive dividend policy and potential share buybacks.

Veterinary specialist CVS contributed +0.81% and rose +31%. In November 2020, the company confirmed that like-for-like sales were up 5.1% for the four months since the June 2020 year-end, despite postponing the annual July 2020 price increase. It saw increased demand in Animed Direct, its online pharmacy and retail business. Strong trading was accompanied by an improvement in margin for the four months, up by 500 basis points to 18.7%. Strong cash generation led to a further reduction in net debt to £40.9 million representing leverage of less than one times, which positions CVS well for future M&A activity. Three small deals were completed in the current year. The improved vet vacancy rate remains stable at c.7.5% reflecting the more challenging employment situation. The veterinary services market continues to benefit from favourable consumer trends with increasing pet ownership following lockdown. The breadth of the company’s integrated model, which includes labs and crematoria, adds to its resilience. A price rise in January 2021 will help underpin growth.

Jet2 (formerly Dart Group) contributed +0.80% after rising +148%, a stellar performance given how hard Covid-19 hit the travel sector. Investors are looking ‘beyond the chasm’ to the ‘new normal’. Jet2 takes a conservative approach to its balance sheet. In its half-year report to September 2020, its cash position, excluding customer deposits, stood at £652.5 million, an increase of 25% since 31 March 2020. This balance included the proceeds from a £172 million equity placing in May 2020, in which the Fund participated, plus the sale of its non-core distribution and logistics business. The company has modelled a downside scenario with an 80% reduction to winter 2020/21 flying, followed by a 40% reduction for summer 2021 and concluded that it would have sufficient resources for 12 months. Finances have been bolstered also to seize on any opportunities created within the industry by the weakness of rivals, as evidenced by Jet2’s recent Bristol Airport expansion. Whilst the company welcomes recent positive news on the vaccine front, it continues to take a cautious approach to summer 2021. Current seat capacity is close to summer 2019 levels and on sale to all its popular leisure destinations. The rollout of the vaccine could be a gamechanger. 

Hutchison China Medtech (HCM) contributed +0.73%. The company has a strong portfolio of cancer drug candidates currently in clinical studies around the world. Clinical news has continued to be good. During the period it was announced that blockbuster cancer drug, Tagrisso, owned by AstraZeneca, has been confirmed for use as a preventative drug as well as a cure. This represents a big expansion of its market. Clinical trials in which it is used in combination with HCM’s Savolitinib, therefore, represent a potential route to unlocking significant returns for HCM by piggybacking Tagrisso’s extraordinary growth. Positive interim analysis leading to a breakthrough therapy followed by confirmatory Phase 3, if successful, could eventually unlock sales of up to $1-2 billion per annum. Savolitinib was granted priority review in China for non-small cell lung cancer. The European Medicines Agency said there was already enough data for it to consider the approval of Surufatinib for neuroendocrine tumours. This drug is now part of a rolling New Drug Application in the US. Fruquintinib, the first HCM drug to be approved in China, started a Phase 3 study for colorectal cancer in the US, Europe and Japan. Three other drugs entered the clinic and five more are expected to go into patients in the next 12 to 18 months. We believe the market is yet to appreciate the full significance of these developments.

Wealth services group JTC contributed +0.72% after rising +36%. The company’s revenues are contracted for several years in advance, so this is a safe port in a storm. In interims to June 2020, trading was broadly in line with expectations as the company delivered 10% net organic revenue growth, strong cash conversion and a 41% increase in the dividend. There was a strong performance from the Private Client Services (PCS) division and substantial new business wins in the Institutional Client Services (ICS) division where momentum remains strong. The latter’s margins were adversely impacted by the underperformance of NES Financial, the technology-enabled fund administration business acquired for JTC’s long-planned entry in the domestic US market. Business in the US should recover, however, and NES also brings some slick reporting products which will be used across JTC. The outlook remains positive and the company is benefiting from structural growth trends, which have accelerated owing to the pandemic. Institutional clients are turning increasingly to the outsourcing of their middle and back offices. In the private client market JTC is seeing more demand for a fund administration white label service. The company sees long-term fundamental drivers for the industry and has a pipeline of consolidation opportunities. In December 2020 it made a complementary bolt-on acquisition, adding scale to its corporate services business line.

Liontrust Asset Management contributed +0.58% after rising +18%. Over the last few years, the company has been a well-oiled machine consistently amassing assets under management (AuM). In deal terms, the highlight of the half year was the £75 million purchase from AXA of Architas, the UK multi-manager. The acquisition completed on 30 October 2020 bringing with it £5.6 billion of AuM. When added to existing AuM, up 28% since the start of the financial year, this increased AuM to £28.1 billion. We decided not to take part in the accompanying £66 million fundraising for Architas as we already have a substantial holding, though we remain enthusiastic in the medium term. Liontrust has been a great performer and has made smart purchases. The best was the £33 million acquisition of Alliance Trust in December 2016, which brought in £2.3 billion of AuM. This has since swelled to £9.3 billion as investors flock towards sustainability. Fund management is a high-beta investment class and looks set to do well as confidence returns to markets. Understandably, given its growth profile and track record, the company is on a premium sector rating but not outrageously so on a 12 month forward rolling consensus price to earnings ratio of 14.2 as of 15 January 2021.

Walt Disney rose +25% and contributed +0.50%. Although Disney reported a loss for its fourth quarter and fiscal year to October 2020, the market instead chose to focus on the performance of its direct-to-consumer business, which Disney described as the ‘real bright spot’ and the ‘key to the future’. On its first anniversary Disney+ exceeded 73 million paid subscribers, far surpassing Disney’s own expectations in just its first year. As expected, due to enforced closures, Covid-19 had a big adverse impact on the parks division with Parks, Experiences and Products revenue down 61% year-on-year to $2.58 billion. Similarly, Studio Entertainment revenues fell 52% to $1.6 billion after significant film releases were deferred or cancelled and theatres closed. The company had no significant worldwide theatrical releases during the quarter and had few titles to offer consumers for home entertainment. Investors are choosing to look ‘across the valley’ to better times.

Mobile payments and messaging specialist Fonix Mobile enjoyed a dream introduction to the market. It floated at 90p in October 2020 and closed the year up +56% at 140p. The contribution was +0.47%. Fonix has positioned itself in the UK as the ‘go to’ direct carrier billing and SMS billing partner of choice for a raft of major brands like ITV, BT Sport and Bauer Radio. Its differentiated, high value brand channel approach generates pricing power enabling it to occupy the ‘sweet spot’. Typically, Fonix can generate a c. 5% margin on transactions processed, which compares with just 0.5% where industry peers deal globally with the likes of Apple. The business has proven resilient with earnings growing consistently throughout the pandemic.

Clinigen detracted -0.41% and fell -27%. In November 2020, the company confirmed that despite the ongoing impact of Covid-19, trading for the year to June 2021 has been in-line with market expectations. There are undoubtedly headwinds. Foscavir, once the mainstay of profits, is bracing itself for generic competition in Europe. It will likely also see generic competition in the US as well in due course. Clinigen believes Japan, a third of Foscavir’s market, will not be affected. Meantime Proleukin, which was bought for over $200 million, has seen steadily falling sales. Those sales are likely to recover sharply when partner Iovance launches its cell therapy. This uses Proleukin as a co-treatment. Unfortunately, Clinigen took a knock in October 2020 when Iovance warned its US drug filing would be delayed. Iovance has published startlingly good clinical data and the treatment remains a priority for review by the Food and Drug Administration. Meantime clinical trials using Proleukin against motor neurone disease also look very promising. Potential incremental Proleukin sales from new indications could be a game-changer for the business. We believe Clinigen represents good value around current levels.

Ten Entertainment fell -34%, detracting -0.42%. Along with other leisure companies the company was hit hard by the Covid-19 lockdown. This was in stark contrast to the fourth quarter of 2020, which saw a strong +48% rebound following the positive news on vaccines. One highlight was the strength of trading once bowling alleys reopened on 17 August 2020. Notwithstanding a 50% capacity constraint due to social distancing, the company traded profitably at 83% of pre-lockdown levels in the first five weeks after reopening. This augurs well once the lockdowns come to
an end. Another positive change is that 70% of visits are now pre-booked, compared with just 30% prior to lockdown, which gives management more ‘touch points’ with the customer. The Fund participated in a placing which left the company well-funded to cope with a lockdown and the monthly cash burn was reduced by 70% thanks to government support. At c. 200 pence the company is on an historic 2019 price earnings ratio of just over 11 times, leaving plenty of scope for a further re-rating once normal trading resumes.

Arbuthnot Banking detracted -0.44% and fell -42%. In its third quarter trading update to September 2020 the bank confirmed that it remains on track to meet forecast market expectations of a small overall loss for year. Arbuthnot has faced the twin challenges of the pandemic’s impact on economic activity and historically low interest rates. However, it remains well positioned to benefit once there is a resumption of normal business activity and has begun to do specialist asset-based lending, hire purchase, finance leasing and refinancing, which should produce better margins. During the period, customer loan balances rose 3%, deposit balances grew 14% and investment management gross inflows increased 24%. The bank retains healthy surpluses of regulatory capital and liquidity that should leave it well-placed once the current crisis passes. Asset quality is stable and payment holidays have fallen sharply.

ITV detracted -0.52%, falling -29%. For the nine months to 30 September 2020, Studios revenue was down 19% and Broadcast revenue was down 13%. Total advertising revenues fell 16% and online revenues rose 2%. 85% of the 230 productions were impacted by the pandemic. Whilst Studios has successfully resumed most of its productions, Covid-19 restrictions continue to hit sales and margin. ITV was forecasting total advertising revenue slightly up year-on-year in the fourth calendar quarter of 2020, with November up around 6% compared to 2019. This assumed the current Covid restrictions in England would end as planned on 2 December 2020. Since then, restrictions have been tightened again. One bright spot is BritBox, which now has over 1.5 million subscribers in the US. Its international roll out is on track. On the upside, Brexit no longer represents a UK macro risk. Longer-term fundamentals may be a challenge given structural pressure on pure brand advertising from audience fragmentation via connected TV and streaming services. However, a post-pandemic rebound in sales looks likely later this year.

IWG, the leading global operator of flexible workspace brands, fell -22%, detracting -0.60%. The third calendar quarter of 2020 was adversely impacted by the pandemic, with total revenue down 10.2%. Customer churn and Covid-19 took its toll on service revenue, which historically accounts for c. 28% of group revenues. In addition, support measures for customers, including rent deferrals, could rise to c. £100 million for the full year. However, as of 30 September 2020, IWG had substantial liquidity headroom of £863 million. In December 2020, this war chest rose to over £1 billion with the issue of a 2027 convertible bond raising c. £300 million. The company sees more demand for flexible workspace post the coronavirus pandemic. Upside potential derives from the application of its war chest to boost earnings, more franchise agreements being signed than currently anticipated, weakened competition and a resurgence in non-rental service revenue.

Marston’s was hit hard by Covid-19 induced pub closures, falling -41% and detracting -0.65%. This was in stark contrast to the fourth quarter of 2020, which saw a strong +71% rebound following the positive news on vaccines. This was in the face of on/off lockdowns. The brewing joint venture with Carlsberg was approved in October 2020, giving the company significant financial headroom with which to ride out the pandemic. Bank facility headroom as at 2 January 2021 was £176 million and weekly cash burn under full lockdown £3-4 million. With the roll out of the vaccine programme now underway nationwide, the company remains well positioned to rebuild trading momentum once restrictions are lifted. The shares closed at 75 pence, which is under seven times the consensus forecast for October 2022. This represents good value.

Covid-19 has adversely impacted aircraft leasing specialist Avation, which fell -53% and detracted by -0.71%. The share has recovered from its lows amidst positive news on the vaccine front. The most immediate and pressing problem for the company is bond redemption. Avation is seeking a two-to-five-year extension on its 6.5% bonds which are due for redemption in May 2021. However, there is no certainty of outcome. Avation has provided support to 14 airline customers, agreeing to defer a total of $13.7 million, which will draw on its $114.6 million cash pile. Encouragingly, as of 23 December 2020, seven airline customers had returned to normal monthly rental levels. Whilst airline customers have begun to return to service, with airlines representing over 79% of unearned contracted revenue flying at greater than 50% of pre-Covid levels, debtor collection within the sector remains challenged. If bondholder support is forthcoming, recovery within two years seems feasible, helped by the company’s big exposure to the regional market which is recovering faster than international and long-haul. The return to service of certain customers helps bridge the gap in the meantime.

Support services group Restore detracted -0.75% and fell -28%. On 1 October 2020 the third quarter update confirmed that revenue had bounced back strongly, reaching 80% versus 2019 and up from 68% at the height of the pandemic in April 2020. Subsequent activity levels in October 2020 were in line with the expected improvement in trajectory. Cash collection remained strong with net debt on track to fall to £65-69 million (pre acquisitions) by year end, a significant reduction from £89 million at the start of 2020. Building on growth in the third quarter of 2020, net box growth in Records Management continued to be positive in October 2020. Management is targeting double digit top line growth comprising 4% organic growth, supplemented by acquisitions and margin improvement. IT recycling has been flagged as an important strategic growth area with two recent acquisitions making Restore the number one IT recycling business in the UK. The company remains a vaccine beneficiary.

Purchases and Sales

During the year we sold Amerisur Resources (takeover), Frasers, Pressure Technologies and River & Mercantile. We reduced the holdings in CVS, dotDigital, Ergomed and Liontrust Asset Management. Codemasters and Future were both added to and trimmed.

We bought Countryside Properties, Elixirr International, Fonix Mobile, Jet2 (formerly Dart Group), Kape Technologies, Loungers, Marlowe, Rank, Venture Life and Volex. We added to AFH Financial, Arrow Global, Breedon, Clinigen, Gamesys, GoCo, Hutchison China MediTech ADRs, Inspired Energy, IWG, Kin & Carta, NCC, Next Fifteen Communications, Prudential, Redcentric, SigmaRoc, SimplyBiz, STV, Sureserve, Ten Entertainment, Tesco and Trifast.


Equity markets continue to climb a wall of worry. However, the rollout of vaccines globally has the potential to be a gamechanger. The arrival of a more infectious strain is a setback, but the vaccination campaign should be able to counter it. The underlying driver of minimal interest rates remains. Alternative, non-productive assets, such as cash in the bank, increasingly offer a negative return and incur opportunity cost. Unlike earlier cycles, we see little risk of fiscal tightening blunting the effect of continued easy money. Meantime the murkiness of Brexit recedes into memory and a major uncertainty is removed for overseas investors. However, we believe that good opportunities remain with which to make meaningful returns from UK equities in this environment whilst maintaining a margin of

Slater Investments

March 2020