[Commentary] Slater Income Fund – Annual Report for the year to 30th April 2021

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Six months

1 year

3 years

5 years

Since launch*

Slater Income Fund P unit class






Investment Association (IA) OE UK All Companies






*A unit class launch 19 September 2011

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.

This year’s strong performance was further proof that emotion is the enemy of good investing. Selling in a crash
can be very costly. Covid-19 sent the market down 40% between mid-February and mid-March of 2020, only for
shares to grind their way back up again.

Having extolled the virtues of steady investment, we must also admit that market seasonality remains a fact of
life. Sell in May, be back by Saint Ledger’s day, as the saying goes. Of course few rules work all the time and
especially when a pandemic has upended the world. Looking ahead we see the quieter months offering
opportunities to put fresh cash to work.

There has been a major rotation since the autumn from growth into cyclicals. This makes sense given how far
growth had led and cyclicals had lagged. The policies of the United States (US) Federal Reserve do cause some
concern, particularly when it insists it will only tighten after the data compels it to act, not in anticipation. Few
motorists have found the rear-view mirror is all they need in getting safely from A to B. Good dividend paying
United Kingdom (UK) companies should be well protected from any transatlantic concerns and the outlook for
dividends is certainly encouraging. Yields took a drubbing from Covid-19 but companies have shown they are
eager to restore pay-outs as fast as possible. Dividends are at lower levels, giving scope for upside, and further
cuts prompted by poor trading are very unlikely because management are applying a good safety margin.


The investment objective of the Fund is to produce an attractive and increasing level of income whilst additionally
seeking long term capital growth through investing predominantly in shares of UK listed equities.

We seek to achieve a consistent performance by broadly dividing the Fund into three complementary categories
growth companies with attractive yields; dividend stalwarts with earnings pointing upwards; and high
yielders with more cyclical upside. In all three categories we are looking to invest across the market
capitalisation spectrum.

Major Contributors – Growth Companies

The biggest contributor was Sureserve, the safety surveyor for social housing. It rose +116% and contributed
+3.30%. This performance had little to do with the general market but rather was thanks to the company’s full
return to health. Between 2016 and 2019 it struggled with the dead weight of its construction operations. After
these were jettisoned the building safety business was able to shine through. In the year to March 2021, its sales
rose 5%, its operating profits rose 22% and its adjusted earnings per share rose 26%. This performance came
despite a 58% fall in profits in the Energy division, which is much smaller than Compliance. Energy had geared
up for a rapid increase in demand for installing smart meters. This was impacted by Covid-19 but it is seeing a
pick-up in demand. We think there is great scope for Sureserve to expand by acquisition.

Liontrust Asset Management contributed +2.13% and it climbed +50%. The company has a great track of
making smart acquisitions, but none can match its £30 million purchase of Alliance Trust in 2017. At that time
Alliance managed £2.5 billion of assets within its sustainable investment funds. By 31 March 2021 this had
ballooned to £10.2 billion as investors flocked to the sector. Sustainable represents over a third of group assets
under management (AuM) and there is no sign of enthusiasm abating. Admittedly, rival managers are chasing this
market but Liontrust has a clear first mover advantage. The company recently announced it is launching a £250
million ESG investment trust. The success of the fund, and where it trades relative to book value, will be a great barometer for ongoing investor demand. The shares closed the year on forward price to earnings (PE) multiple of 16 and a yield of 3.3%.

Randall & Quilter (R&Q) delivered +2.00% and rose +19% in an important year of transition. Founder Chairman
Ken Randall retired on 1 April 2021, handing over to William Spiegel. Alan Quilter remains Chief Executive
Officer (CEO) but it also likely to move on. Now firmly centred in the US, R&Q is gradually moving from buying
run-off portfolios to acting as a conduit and filter between local managing agents in the US and elsewhere and the
global-scale reinsurers. The ‘program management’ business builds up steadily as R&Q collects around 5% of
premiums that pass through its books from the local insurers up to the reinsurers. Clear Blue, a US program
manager, is currently up for sale at a reputed PE of 16. At that rating, R&Q’s shares would have around 50% near
term upside. This a complicated business and the 6.4% running yield gives the shares good support in the

Marston’s staged a remarkable recovery, contributing +1.80% before it was sold in March 2021. The company
was able to avoid tapping shareholders thanks to the partnership with Carlsberg which left it with 40% of their
combined breweries and a welcome £273 million cash windfall. We believe the earlier appointment of a robust
Chairman was also critical in reining back the management’s appetite for spending on new hotels.

STV rose a sparkling +48% and delivered +1.65% contribution. At the annual general meeting on 29 April 2021
the company reported that advertising grew 10% in the first four months, year on year, including a 26% increase
from video on demand. Hours streamed doubled in the first quarter. The company is lucky to have a CEO of high
calibre. The TV companies seem to be navigating the transition from broadcasting to narrowcasting with some
success. Aside from Ceefax, of distant memory, they never had classified advertising income, whereas for
newspapers this was a mainstay and a painful loss when Google arrived. The internet has therefore taken longer
to impact and been less painful. TV is allowed into the heart of people’s lives and it therefore remains the best
potential conduit for advertisers. Narrowcasting allows targeted advertising and will only amplify the TV set’s
importance. The key to success will be quality and targeting of programming. STV is determined to show there is
life beyond Taggart. The signs are encouraging.

Arrow Global trebled in the year and contributed +1.64%. Frustratingly it was forced to accept a bid from private
equity because this was supported by founder Zach Lewy. He ran the engine room of the business, the buying of
problem loan books at heavy discounts. He and the bidders could see that Arrow was about to raise its return on
capital sharply as it moved from being an asset owner to an asset manager.

Strix climbed +53% and contributed +1.57%. Full year results showed revenues down 1.6% but profits were
modestly higher. The pandemic struck early in China where its products are assembled, and then of course other
markets suffered. Growth will accelerate sharply this year as life gets back to normal. Consensus forecasts for
2021 to 2023 are not drop-dead exciting, seeing profits grow at 10%, 7% and 6%, but the company has big hopes
for its rapidly broadening product range. This suggests much better sales figures are likely, though at lower

Fonix Mobile, bought when it floated in October 2020, proceeded to double by 30 April 2021. The contribution
was +1.24%. Interims in February 2020 reported revenues up 25% and gross profits up 22%. The float was at a
bargain price but the prospects remain encouraging. The company offers payment services via carrier billing.
Consensus earnings per share growth forecasts of 13% for June 2021 and 12% for June 2022 look conservative.
Contracts can be lumpy but Fonix has a good record of winning steadily larger shares of business from key
customers. Commercial radio stations have been its biggest market but it currently has high hopes of contracts
with ITV. Austria will be the company’s first foray outside the UK.

Ten Entertainment suffered a torrid 2020 yet the shares bounced +49% and the contribution was +1.20%. To
still gain 5% over the two years despite months of closure for its bowling alleys is pretty impressive. This is a
business which benefits when it rains, so this year’s wayward Jetstream is distinctly helpful.

City of London Investment Group contributed +1.63%. It rose +71%. This is a real gain as even over two years
the advance was 26% plus it paid 14% in dividends. The main event of the year was the £78 million merger with
Karpus, which took AuM from $4.4 billion to $7.8 billion. Brokers expect June 2021 year end earnings to rise
37% with the dividend growing by 10%. The forward yield was 6.3% as at 30 April 2021. We expect the
company’s refreshed management will inject new life into the business.

Legal & General (L&G) rose +33% and contributed +1.49%. Admittedly the shares suffered particularly badly
during the panic, falling 44%. By period-end they were back on terms with their level two years before, having
delivered 13% in dividends along the way. L&G is a leading player in the purchase of bulk annuity books. This
is a scale game, and the company has the balance sheet and back office to exploit it. If we enter a period of higher
inflation, L&G will be benefit because, grim as it is, those annuity obligations will shrink in real terms. The big
insurers have more freedom than pension funds under capital allocation rules to deploy their assets efficiently.

Phoenix Group contributed +1.21%, rising +18%. Like L&G the shares suffered violently during the crisis and
have gradually clawed their way back. In this business the term ‘management action’ is used frequently. Again,
as with L&G, this boils down to using the balance sheet as efficiently as the rules allow. Now the UK is outside
the European Union, there is the prospect that very constricting capital rules will be relaxed. Will insurers continue
to be forced to hold low returning fixed interest assets? We note that Phoenix has confirmed it is in talks to sell
its European assets. The price reported was £550 million. The sale would give it good firepower to benefit from
any rule changes.

Morses Club was a dismal performer, detracting by -0.50% and falling -29%. Covid-19 was clearly a big handicap
to its doorstep lending but regulatory pressures have also loomed large. Rival lender Provident Financial has
announced the closure of its doorstep business, preferring to concentrate on car loans and credit cards. Morses has
grown its digital offering but thinks there is life in the door-to-door business.

Chesnara fell -17% and detracted by -0.67%. The annuity business is one of scale and investors have become
understandably frustrated at its slow pace of expansion. It has managed some small purchases in the Netherlands,
but we note that Phoenix prefers to move its capital back to the UK. The shares yielded 8% as at 30 April 2021.

GlaxoSmithKline (GSK) detracted by -0.77%, falling -19%. The company has already agreed to demerge its
Consumer and Pharma divisions but activists have now turned their fire on the CEO. Her background is in
Consumer but she wants to stay in charge of the Pharma business. Pharma is a very long-term activity and the
outcome of decisions often only becomes clear many years afterwards. GSK has suffered from its decision in
2015 to exit oncology in a $16 billion disposal, only to buy back in expensively with the $5 billion purchase of
Tesaro. Meantime its vaunted leadership in vaccines has yet to produce an approved product for Covid-19. The
yield is expected to fall from 6% to 4.6% next year as the dividend is rebased.

Contributors and Detractors – Cyclicals

Rio Tinto was the third biggest contributor, at +2.11%. The shares gained +65% to close the year on a forward
multiple of 7.8 and a yield of 9%. Iron ore remains the heart of the group, followed at some distance by copper
and aluminium. A combination of strong Chinese demand and reduced supply from Brazil helped the spot price
of iron soar 140% during the 12 months. Extraordinary as the rally seems, it only brings prices back to levels seen
in 2008 and 2011. During the current cycle the big mining houses are yet to start raising investment. The Chinese
have been active but western miners seem not to have recovered from the trauma of the great financial crisis. This
hesitancy combines with helicopter money from central banks to keep driving prices higher.

Morgan Sindall contributed +1.77% after gaining +79%. The shares have trebled in value since they were first
bought. Classifying the company as a cyclical is therefore debatable. It is a very well-run company where the
Chief Executive still holds over 8% and his beady ‘owner’s eye’ is ever alert. The Fit Out division has continued
to perform astonishingly well. This grew relentlessly and looked sure to fall back sharply as the economy slumped.
Instead, property owners used the opportunity of empty buildings to bring forward refurbishment plans and to
make spaces more suitable for new styles of working. Construction did narrowly overtake Fit Out as profit contributor in the year to December 2020, at £35.7 million versus £32.1 million, but the company still expects a steady £35 million per year from Fit Out in future. The driving strategy of the business is to deploy capital in the Partnership Housing division. This made a Covid-impacted £16.1 million but in the medium term will be the heart of the business. The quoted competitors in this sector are Vistry and Countryside Properties. The main, and much softer, competition comes from the housing associations. These are non-profit organisations and, probably as a result, they struggle versus the commercial players.

Forterra detracted by -1.14% and it was sold.

Additions and Disposals

We opened new positions in Fonix Mobile, SSE and UP Global Sourcing.

We added to holdings in Anglo Pacific, Hollywood Bowl, M&G, Norcros, Regional REIT and STV and
received shares via corporate actions from Duke Royalty, Randall & Quilter and STV.

We closed our positions in Arena Events, Barclays, Centaur Media, Close Brothers, Forterra, Greencoat UK
Wind, ITV, LafargeHolcim, Lloyds Banking, Lok’n Store, Marston’s, Mears, National Grid, Ocean Wilson,
Provident Financial, Prudential and RBG Holdings.

The following holdings were trimmed: BP, Brewin Dolphin, Chesnara, City of London Investment Group,
GlaxoSmithKline, Legal & General, Liontrust Asset Management, Morses Club, Phoenix Group, PRS
REIT, Randall & Quilter, Rio Tinto, Royal Dutch Shell, Strix, Supermarket Income REIT, Ten
Entertainment and Tesco.

Our position in Redcentric was both added to and subsequently sold out during the period. The shares received
via corporate action for Duke Royalty were also subsequently sold.


We always have to keep a weather eye on major risks. Fears of rising inflation need to be taken seriously but we
see the income sector as better protected from these concerns and from turbulence in overseas economies.
Valuations are generally lower than elsewhere and dividends should be more resilient than normal after the
baptism of fire last year. The UK can look forward to several years of long-awaited political and economic calm.
This on its own should give us reason for confidence.