Mark Slater: finding growth at a reasonable price

Merryn Somerset Webb talks to phenomenally successful investor Mark Slater about how he consistently finds good growing companies to buy without breaking the bank.

• If you missed any of Merryn’s past interviews, you can see them all here.

Merryn: Hi, I’m Merryn Somerset Webb, editor-in-chief of MoneyWeek magazine. Welcome to another one of our video interviews.

And with me today I have Mark Slater, who is the founder, chairman and CIO of Slater Investments. Many of you over the years may have read articles in the magazine about and by his father Jim Slater, so we already have an introduction to your style of investing, Mark, there.

So tell me, your core strategy and your most important fund is growth. Can you explain to us, before we go on to anything else, what you mean by growth? Because we get a lot of different definitions.

Mark: Yes. labels are very interesting in the investment world, because I think people tend to feel that, with particularly growth, that growth is momentum and expensive over here, and value is cheap but hopeless over here. What we’re trying to do is to buy businesses which have a degree of dynamism in terms of earnings growth, but we’re trying to buy them, introduce value factors as well. So we’re trying to buy them cheaply.

So if you like, what we’re looking for is growth at a reasonable price.

Merryn: OK. Isn’t that everyone’s looking for?

Mark: Not everybody, because some people are after yield, some people are after deep value.

Merryn: But even if people say they are after yield, they’re after a growing yield, so they’re still effectively trying to buy growth at what they consider to be a reasonable price.

Mark: To a degree. Yes. What we try and do, though, is introduce a significant value of safety, marginal safety, by using these value factors. So there are growth companies we wouldn’t buy.

So for instance, we don’t own ASOS, the online retail business. It’s been a mistake, by the way, we ought to own it. But we don’t own it because it’s on a multiple of 50 or whatever it is. It’s a very, very high rating. We don’t go beyond a 20 multiple of earnings. That’s one of our testing factors.

Merryn: OK, well let’s talk about those parameters. What are the parameters that tell you something is a reasonable price?

Mark: Well, we screen the entire universe.

Merryn: When you say the entire universe, what…?

Mark: The UK market. So we screen that entirely.

Merryn: All sizes?

Mark: Everything. Yes. To begin with. And we are looking for businesses which are likely to grow their earnings over the next few years. We look for a degree of consistency in the past. We look for companies where we can buy that growth relatively cheaply, which is the sort of value factor. We use the PEG as the wide end of the funnel, comparing the P/E with the growth rate.

We look for cash flow in two ways: we’re looking for businesses which convert profit into cash and also which generate free cash flow.

And those key areas, in other words, growth, reasonably priced growth, and cash flow, get rid of 90-95% of the universe straight away. I mean, most companies are not growing or they’re expensively rated or they’re not generally cash. So very quickly we have a manageable shortlist of companies which are worth focusing on. And in our view, we’ve got rid of an awful lot of rubbish. So we then, with our shortlist, we focus then on businesses really from that point on, where we start in a much more qualitative way, and once we have our shortlist… sorry, we start in a quantitative way, and then we become much more qualitative. And the qualitative factors we’re looking for are, first of all, high returns on capital, which is normally indicative of a good quality business. We want, ideally, businesses in some sort of niche, some sort of business doing something particularly well.

And I think the most important we try to identify is a tailwind that gives us confidence that growth will continue. And that can come in all kinds of shapes and sizes.

Merryn: OK. Does this involve meeting the management and engaging with the management before you buy?

Mark: At the end, yes.

Merryn: At the end. So the last part of the process is to go and see the management?

Mark: Yes, I think it’s the least important part. For us it’s the least important part, mainly because I think it’s easier to assess a business than it is to assess a management team. Management teams, if they’re any good, are trying to sell the business to you. So yes, they have a conflict. So…

Merryn: So if you see them early on in the process, it may sway your judgement during the remainder of the process.

Mark: It’s more likely to, yes. The normal thing is, and I’ve had this in the past, where when we started out, our biggest mistakes tended to be related to meeting management too early.

So management would tell you that they were very confident they might win a big contract, whatever it might be, and if you hear that too early in the process, it’s difficult for it not to disturb your thinking.

If you meet them at the end of the process, you know the question. You know which gaps you want to be filled in. You know what you don’t know, or at least you think you do. So I think it’s a much healthier way of going about things.

Merryn: OK, so let’s say you get to the very end of the process, you go see a management team. And what is it that might then stop you buying. What is it about management that is off-putting?

Mark: Well, I think there aren’t that many things, really. I think obviously if they have a bad track record, that weighs on things. If they’re… if they come across as dishonest, then that’s a deal-breaker, or if they have a track record of dishonesty, even worse. We probably wouldn’t be meeting them if that were the case.

Merryn: Well, yes, hopefully you wouldn’t have got to the last bit!

Mark: We would probably have identified that earlier. But yes, those sort of things. Really what we’re looking for when we meet management is to understand the business a bit better and to try and understand their long-range view. And if it’s intelligent, and if their hopes for the business are intelligent, then that’s likely to be supportive of the investment case.

Occasionally, you do get situations where they might tell you things about the business that you don’t like, or they might tell you things about their own plans for the business you don’t like. So it’s more strategic and how they see the business and what they hope to do with the business. It’s that kind of stuff that we typically focus on.

Merryn: And once you’ve bought, do you keep engaging with management? Do you see them regularly or are you a…

Mark: No, we see them every time they report, basically. Not every time they announce something, that would be every two weeks… in most companies, it’s endless now. But yes, probably twice a year, maybe three times a year. If the business is a little bit complicated, it may be a bit more than that. But we’re not all over them. And we engage to the point where we’re just trying to understand what’s going on. And we don’t go much beyond that, unless there’s a problem.

Merryn: OK. And how many… let’s stick with the growth fund, because it’s the most important one for you, really, isn’t it… how many stocks in that portfolio?

Mark: Today, there are 50. We typically have between 35 and 50 names. At the moment, we’re actually coming down. The number will end up somewhere between 42 and 45 once we’ve… we’re just clearing up a little bit of a tail of smaller positions.

Merryn: OK, and what’s the rationale behind that number?

Mark: We believe that you can’t have an infinite number of good ideas. We typically have 35 to 45% in the top ten names, so there’s a reasonable degree of concentration in the best ideas. The tail stocks tends to be either slightly lower conviction possessions or less liquid positions. And…

But really, it’s just that there aren’t enough good companies to have a lot more than 50 numbers on.

Merryn: In the entire universe of UK stocks, you only end up with 50?

Mark: It’s pretty sad, isn’t it?

Merryn: Really sad. Not encouraging at all.

Mark: No, but you know, some are better than others. So it’s important to own the ones that are best.

Merryn: OK, well let’s talk about what is in the fund. What’s particularly interesting at the moment in terms of sectors? Perhaps let’s start there.

Mark: Yes. We do end up sometimes with concentrations in certain sectors.

Merryn: Yes, and you may not look at sectors on purpose, but you will find you’ll end up…

Mark: Yes, we could end up there. So I would say… there’s no particular sector theme, because the sectors where we do have concentration typically are kind of catchall sectors. You know, “support services” means what you want it to mean.

So our bigger positions are typically quite niche-y businesses, so they’re… you know, one of them reported today, it’s a company called CVS Group, which is the leading veterinary business of the UK. It’s a fantastic business, because it’s an area where people… it is discretionary spend to a degree, but people tend to look after their pets pretty well.

Merryn: And anyone who has a pet will know just how high the margins for veterinary businesses must be.

Mark: They are fantastic. And it’s also an industry which is still very fragmented, and this company is the leading stock consolidator. And it’s just a great model. It generates lots of cash, there’s good visibility for us as investors in terms of future growth. They’ve got a long way to go in terms of the consolidation. They had a 10% upgrade to earnings this morning based on good trading today, this year.

Merryn: And is the pet population of the UK rising or falling.

Mark: It depends on the pet. But it’s risen a lot over the last 20 years. The direction of travel is positive, but this company is also unusual in they can handle big pets as well as small pets.

Merryn: What’s a big pet?

Mark: a horse. They’re very expensive. And they’re also taking the model into Holland, which is a very comparable market to the UK. They’ve just started doing that this year. So they’re doing pretty well there.

But the key thing is the nature of spend. The only way in which the like-for-like growth would drop is if unemployment picks up significantly. But otherwise, the main issue is the weather, because if it’s raining, people don’t take the dog for a walk, and the dog doesn’t get injured. It is as simple as that.

Merryn: But the dog gets fat. And that may need attention, too.

Mark: Yes, but that doesn’t matter. I guess ultimately, maybe. But what I like is there are a lot of problems in the world, there is generally a lack of demand in lots of areas, this is an area where people spend money and it’s a priority spend. So there’s a clear tailwind behind this business.

And I think generally, and this has been the case, I think, since the crisis, for most businesses, there’s a degree of headwind. So it’s a much better place to be.

Merryn: And that comes at a reasonable price?

Mark: We bought it at a very reasonable price, it’s had a good run, and it’s trading today on around 20, 21 times next year’s earnings.

Merryn: OK, so it’s not that far off your limit.

Mark: Yes.

Merryn: Because you said you wouldn’t go beyond, was it, 25?

Mark: 20. 20 forward. But for our point of entry, we won’t go above 20, but we will run profits beyond that.

Merryn: OK, so where are the parameters for selling that?

Mark: Quite different, really. I think there’s quite a significant difference. We won’t go above 20 times when we buy, we will run profits quite aggressively, and really there’s no particular multiple number, it very much depends on the quality of the business and the growth rate. What we tend to find with the best businesses is that they outperform on the upside in terms of expectations. You get lots of upgrades, normally. They’re also very hard to replace.

So again, over the years, we’ve found this in the past, where if we’re too quick to take profits, you very often end up buying the same company back a year later, which is silly…

So we typically buy businesses as long as the business is doing well and the dynamics are in place. As long as the price doesn’t go mad, we will hold for a very long time.

Merryn: OK, so what’s the turnover in the fund?

Mark: Very, very low. I mean, our average holding period’s about five years, and, you know, when we buy businesses, ideally we will own them forever. That’s obviously an ideal. It’s rare we can actually do that, because normally either the price goes crazy or the growth rate might quieten down at a certain point. So we have to manage that. But our aspiration with a business is as long as it keeps doing its thing, we will keep owning it for a very long time.

Merryn: OK. And this is quite important, because it keeps your ongoing charges relatively low, despite the fact that your management fee is relatively high.

Mark: Well, our management fee is not that high. It’s a normal sort of thing.

Merryn: One and a half percent?

Mark: Yes, but the platform charge is much lower. And so most people nowadays come through a platform. So our dealing costs are low, yes, and we’re very mindful of that.

Merryn: Well, let’s get back to the stocks. What else is interesting in the portfolio?

Mark: Well, that is a great business … I mentioned it to you because it was reported this morning. But we own a lot of niche-y businesses of that kind, so another one we own is… which has some… it’s comparable to a degree, because it’s an acquisitive model, is a company called Restore Group, which we’ve owned now for many years, seven years, I think.

And they are the leading… well, the second largest player in document storage. Very boring, simple business. It’s an annuity stream. Once, you know, Linklaters sends their boxes off to be stored, they’re going to be there for over 20 years. Scanning is extremely expensive, and as a result, we will keep producing paper. The average professional firm’s store of boxes will rise between 5 and 8% per annum. So the paperless office is a complete myth.

Merryn: Total myth. We all know that.

Mark: Unless you work at Google. Apart from Google.

Merryn: We all know that from our own offices. We’re all surrounded by piles of paper.

Mark: Exactly. You send an email, you print it off and read it, you know, if it’s a long one.

Merryn: I don’t go if I go quite that far.

Mark: But a lot of people do. If it’s very long. And certainly in professional firms – accountancy, law – they do need reams of paper to do what they do. And so you’ve got an annuity stream in terms of the customer and the boxes the customers send them to be stored.

And that’s been a wonderful model over the years, because you’ve got the organic growth behind it, it’s just the number of boxes being stored. You’ve also got highly accretive bolt-on acquisitions. And we’re not great fans of highly acquisitive businesses, but when companies can do bolt-ons in their area, it’s much lower risk. It’s a very, very attractive thing to do, I think.

And they’ve been able to buy lots of mom-and-pop operators all over the UK and consolidate them on a highly accretive basis. They’ve also gone into other areas of the office environment. So they got into shredding, they got into scanning, they got into a whole lot of other areas that are related. They’ve gone into office moves as well, actually.

And the dynamics in those industries are also attractive, and the spending decision is often made by the same person who makes the decision on the boxes. So there’s lots of good common sense behind what they’re doing.

And again, they’ve achieved an earnings growth rate of between 15 and 20% per annum for a very long time. And they’re still delivering the goods.

Merryn: And they’re on a price that would still be reasonable to buy now?

Mark: Yes, it’s reasonable. We’ve held them a long time, but their multiple is in the sort of upper teens. But with that kind of growth rate, I certainly would say that a 15% growth rate today is comparable, probably, to a 30% growth rate not that many years ago. You know, it’s tough to grow at that rate. So when a business can do it on a low-risk basis, it’s very attractive.

Merryn: Neither of these businesses, and I’m assuming most of the rest in the fund, as well, sound like the kind of businesses that would be hugely affected by politics.

Mark: No.

Merryn: So there’s, you know, an awful lot going on in the political environment recently. We’ve had Brexit, we’ve had Trump, we’ve had all the worries in the EU, etc. Do any of these things make any difference whatsoever to the way you invest?

Mark: No. The short answer is no.

Merryn: That’s the answer I was expecting, by the way, but I’d be interested if there was a long answer.

Mark: No, there is a long answer. And I think that the American election, we weren’t particularly bothered about. I mean, as citizens, it’s interesting, but as investors I don’t really think it has a huge impact on the kind of businesses we own. They’re just doing their thing.

Merryn: And it might give a little bit of global growth, which could make some difference to the margins.

Mark: No, I mean personally I think Trump, well, I mean, from where he started, I think he can’t do anything but surprise on the upside. From where we are now, people are now assuming there could be a good boost to growth. We’ll see. I think that there’s a range of expectations there. I think the upper end probably will be disappointed, the lower end probably will be pleasantly surprised. But my personal view is it isn’t a bad idea to try something new. QE, in the end, isn’t going to work. It hasn’t worked, so I think it demonstrated that Big Brother was… you know, the government and central banks were there to help, but no more than that, really.

So I think that this high levels of spending is an experiment that needs to be tried. So I’m not worried about Trump and it didn’t have any meaningful impact on the companies we own. Brexit, interestingly, at the operational level, has had a minimal impact. I mean, pretty well every… even companies which are very consumer-orientated in the UK, housebuilders, Marston’s the pub business, they reported this morning. Even businesses like that, they’re all coming out and saying there is no discernible impact on their day-to-day business, apart from a couple of weeks. There’s no impact.

So now that’s really interesting, I think. The main impact on us, taking a slight step back from the operational side of things for the companies we own, the main impact on the market for UK investors has been the huge impact on the currency. And that had a very big impact on indices. The biggest 30-odd companies in the FTSE 100, mainly are big dollar beneficiaries, they had an instant re-rating, a 20% type re-rating over two or three days. So that had a big impact on the index. If you were in that, it was great. If you weren’t, it wasn’t, on a relative basis.

That seems to be calming down, now. Some of the companies that had these big moves are actually tracking back to where they started, gradually. So it’s had a big impact on indices, but operationally, for the businesses we own, and that’s ultimately what we focus, on ,that’s the only bit we can really get right. That’s the bit we should be focusing on. There’s been minimal impact.

Merryn: You said earlier that it was really interesting that there’d been no impact at the consumer level, but isn’t that just because this has only just begun?

Mark: Possibly.

Merryn: You know, it’s as if we’re in a holding pattern stage, so why would anyone change their behaviour in the short term?

Mark: Well, except that… one of the things people like to look at with recession is the number of times it comes up on Google. It’s everywhere. And it’s been everywhere now for a long time.

Merryn: Isn’t that mainly just a Treasury thing, and over and over and over again?

Mark: Well, and the press. I think everyone’s looking for this recession desperately and, as yet, people are infuriatingly not providing one. But let’s say we’ll see. But I don’t believe that’s necessarily a referendum issue. I think the direction of travel of the economy was not great anyway. Growth was clearly going to slow. Now maybe it’ll be a little bit worse. Who knows? I’m surprised to see the amount of… I haven’t seen before this level of discussion of recession without a more meaningful underlying impact. So that’s slightly surprising.

Merryn: You sound gorgeously optimistic. I like that.

Mark: Well, what makes me optimistic, in a way, is just how gloomy everybody is. You know, everyone talks about this bull market being the least loved bull market in history and all that, which it is. But it’s fascinating that everywhere one goes, people are in cash. There’s lots of cash. Institutional levels of cash are the highest they’ve been for ages, the participation of retail investors in the market is very, very low. Most commentators are worried, and there’s lots of stuff to be worried about, and I think all these news events; these moments that feel binary, like Trump, events like the referendum. People are worn out by all this stuff.

So there’s a lot of gloom. There’s lots of cash on the sidelines and yet markets are generally going up.

Merryn: And the companies that you’re invested in are continuing to grow and do well.

Mark: Operationally, they’re doing well. I mean, the other thing that’s quite bullish, I think, is… the least bullish part of the equation is valuation. Clearly valuation generally is I think, one could… you could argue it’s normal-ish, or at the upper end of the normal range. I don’t think valuation’s absurd, but they’re definitely fairly…

Merryn: Well, in the UK at least.

Mark: Yes, and in most of the other markets, I think they’re reasonably full. But what is interesting is the earnings recession, both in the US and the UK over the last two years. It does seem to be ending. That may be a blip, but if you look at a chart of it, there’s been a bottoming out of earnings and they fell for a couple of years and they’ve been picking up, which is encouraging.

But I guess to me the most important thing, the most encouraging thing, is just how little interest there is in equity markets at the moment. That has to be good. I mean, it’s better than when people are fascinated by them.

Merryn: Yes, absolutely. There’s a lot of new money to come in when people start getting interested again.

Mark: Yes, it’s on the side-lines, yes.

Merryn: On that happy note, I think we should leave it there. Thank you very, very, very much. That’s really interesting. And MoneyWeek readers, you should know that we are surrounded in this office, and in the corridor out here, by awards. Mark seems to have won every single award on offer from every single organisation there is.

So thank you very much for your time.

Mark: Great pleasure.




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