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*A share class launch 19 September 2011

Overview and Outlook

There may be a parallel universe where the coronavirus never happened, and in which the Slater Income Fund
continued the strong performance of its first nine months. Unfortunately the virus did burst upon us and it
proceeded to overwhelm markets which were previously trending strongly upwards. Covid-19 has caused the
most widespread disruption in this country since the unhappy reign of Charles 1st, whose civil wars killed 4% of
his subjects. World wars have been associated with soaring economic output, even though followed by a painful
belt-tightening as the bills were paid. In our present situation we are enduring a slump to be followed by belttightening,
eventually. So much so gloomy. Yet since the lows on 23rd March the UK markets have staged a
dogged recovery. Is this just misguided animal spirits? Not really. Returns on capital vary from year to year
thanks to the ups and downs of financial conditions, particularly monetary conditions. But these good and bad
years tend to even out as time passes. The annual return for the UK Mid Cap index, for example, has averaged
7.4% since 1st January 2000. Other 20 year periods have delivered more or less, but adjusting for inflation the
returns are remarkably steady. This is because companies operate in much the same way from one year to the
next, regardless of whether Mr Market is happy or miserable.
Bullish investors normally cling to the belief that ‘this time will be different.’ Currently it is the bears who argue
this downturn will be different. The pandemic is certainly unusual because the lockdown, rather than the virus
itself, put a halt to economic activity. On that basis, the shock is man-made not virus-made, and can therefore be
reversed. It has been reversed in country after country. So it seems reasonable to take the view that this time will
not be different. Recession will be followed by recovery in the usual, undifferent, way.

Objective

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.
We normally give a detailed account of company performance but this year restrict our commentary to more
general points. Before the virus struck, most holdings were trading well. The crisis has broken the connection
between specific company news and share price behaviour. We will give fuller comments in future reports when
markets have steadied.

Contributors

Liontrust continued its excellent run, defying the market-related downdraft which has punished so many
financials. Picking the right sectors for expansion, such as sustainable investing, has driven this performance.
Safecharge International, Charles Taylor and Telford Homes all succumbed to takeover bids. Sureserve
rallied strongly after selling its long-troubled construction business. GlaxoSmithKline has been a point of calm
within the maelstrom. Its strength in vaccines has been helpful as has some decent drug news. Lok’n Store is
steadily building its network of storage centres, bringing strong recurring revenue. Strix makes kettles, even
more in demand during lockdown. Redcentric’s network services enable remote working while Gamesys’s
online bingo and casino have seen strong demand. Supermarket Income benefits from offering gilt-like
income, growing with inflation, helped by the new importance of supermarkets.

Detractors

Financials came under severe pressure as markets fell and worries grew. This accounts for the weakness at
Premier Miton, Palace Capital, Legal & General Group, Duke Royalty, Morses Club, Barclays, Lloyds
Banking Group and Randall & Quilter. Centaur Media has slimmed down to a manageable core, but
marketing is suffering currently. LafargeHolcim ran into heavy headwinds this year as Chinese construction
shut down, followed by weakness in Europe and then spreading globally. Forterra and RPS Group are seeing
similar problems, in RPS Group’s case made worse by its exposure to oil services. The price war between Saudi
Arabia and Russia could hardly have been worse timed. BP and Royal Dutch Shell felt the impact. ITV and
STV Group have both made good strides in reducing their dependence on advertising, but for now it remains
the bedrock of their profits. Imperial Brands struggled with tighter regulation of vaping products in the US.
Arena Events Group and Ten Entertainment were virus casualties, with sporting tournaments cancelled and
bowling alleys closed. Marston’s was hit hard with pub closures, though its breweries remain in production.
Maintel Holdings’s problems cannot be blamed on the epidemic. It continues to struggle with the transition of
phone and data traffic to the cloud. Similarly, Ocean Wilson Holdings’s fall reflects disappointment that the
sale of its Brazilian ports subsidiary failed to happen.
Additions and disposals
We bought Countryside Properties, Mears Group, National Grid, Norcros, Premier Miton, Provident
Financial, Secure Income REIT, Sirius Real Estate, Tesco and Urban Logistics REIT. By demerger from
Prudential we gained a position in M&G. We added to holdings in Arrow Global Group, Greencoat UK
Wind, H&T Group, MJ Gleeson, Morgan Sindall, Morses Club, PRS REIT, Prudential, Real Estate
Investors, Supermarket Income REIT, Ten Entertainment and Tesco.
We sold Diversified Gas & Oil, Ince, Gamesys and Mortgage Advice Bureau. Safecharge International,
Charles Taylor and Telford Homes all succumbed to takeover bids. We reduced positions in Centaur Media,
Close Brothers Group, Hollywood Bowl, ITV, LafargeHolcim, Legal & General Group, Liontrust, Lok’n
Store, Marston’s, Phoenix Group Holdings and Rio Tinto.
Dividend outlook
We have analysed the likely impact on the Fund’s dividend income of the series of reductions, deferrals and
cancellations which have been announced since the outbreak of Covid-19. It came as some relief to learn that
most of the Fund’s dividend income is being maintained. Based on available information we expect that 70% of
last year’s income will be received this year. On a pessimistic basis, up to 15% of the balance might be a
permanent reduction, with the other 15% likely to return after the dust settles. Dividends have become a political
embarrassment for many companies but when reinvested they generate the bulk of investor returns in normal
times. So the embarrassment can only be temporary.

Conclusion

This has been an extraordinary time to navigate with events moving very fast. Comments made one week
become overtaken in the next. The cancellation or deferral of dividends is clearly a challenge. It forces investors
to focus on balance sheets, on the one hand, and two year prospects on the other. Disruption will be serious this
year but epidemics come and then they go. So will Covid-19, and good riddance to it.