Tom Dobell (pictured) has hit back at claims his £7.6bn M&G Recovery portfolio is too big to be considered as a true recovery fund, insisting its enormous size has had no bearing on performance.

The FE Alpha Manager claims that his fund only looks large in a retail context and has more than enough flexibility to take advantage of opportunities across the market cap spectrum. 

"Size isn’t an issue for us," said Dobell, in an exclusive interview with FE Trustnet. "We get asked about the size of the fund a lot – it’s been a recurring question for a number of years."

"The investment approach hasn’t really changed since the fund’s inception in 1969. The fund hasn’t needed to hold more large caps because of its size." 

"We have found recovery investments from large caps through to smaller companies and the proportion of large- and medium-sized companies within the fund hasn’t materially changed since I took the fund on [in 2000]."

"This fund has taken over 40 years to get to this stage and remains a very viable proposition, having stood the test of time through many cycles and several market crises."

"More recently, challenging times for the economy have presented us with many investment opportunities and continue to do so. Finding new ideas for this fund is certainly not a problem."  

He added: "Yes, there has been some substitution of AIM-listed companies relative to FTSE Small Cap stocks in the fund over that period, but this is in-line with the broader market trend of company listings anyway."

Dobell does accept, however, that he has had to adapt certain practices in the fund because of mass inflows in recent years.

According to FE data, M&G Recovery grew from £4.2bn in September 2009 to £7.6bn to the end of September this year. 

"The one thing that I would concede has changed over the last decade is that we think about how scalable our holding may be in a potential purchase at a much earlier stage of the process," Dobell continued. 

"At the same time we consider whether the investment will reward us sufficiently, given all the work we will have to put into it, in terms of moving the needle in performance returns at the fund level. This still hasn’t been a constraint as such." 

He says the fund will never have a specific mid or small cap focus, but is comfortable taking big stakes in a company so that it has a material effect on the portfolio.

"We may take a position of up to 15 per cent of a company’s equity, 20 per cent by exception," he added.

"At the moment, the conviction weightings within the portfolio – those holdings that are overweight relative to the benchmark in excess of 1 per cent – amount to 30 names, representing around 61 per cent of the fund."

"But there are only five of these companies where M&G as a group holds 10 to 15 per cent of the company’s equity and only one where M&G owns over 15 per cent. That’s clearly a very scalable portfolio." 

Among Dobell’s biggest off-benchmark positions is a 2.1 per cent exposure to Kenmare Resources, which is in the FTSE 250 index. 

Dobell’s defence comes in light of comments made by Rathbones' chief investment officer Julian Chillingworth, who believes M&G Recovery's huge size means it can no longer be viewed as a traditional recovery fund.

"I don’t think it is a recovery fund anymore, it is too big," said Chillingworth, who co-manages Rathbones’ mid cap-focused Recovery fund. 

"I don’t see a lot of these large portfolios as being 'recovery' funds in the true sense of the word."

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"The size of the fund and the liquidity issues that go with it make it difficult from them to move out of their current holdings and into new recovery stories." 

However, Dobell rejects these claims and says that the size of the fund has actually helped the fund’s recovery focus. 

"Our size and reputation afford investment opportunities themselves. Companies actually seek us out to potentially invest in them. This can give us a significant advantage in terms of negotiating a deal with the management," he commented.  

"We had a good level of flows into the fund in 2011 again and very much remain open for business."

According to FE Analytics, M&G Recovery has delivered top-quartile performance over five- and 10-year periods, although it has slipped into the bottom quartile over one and three. 

Over the last decade, the fund has made 198.94 per cent. This is well ahead of the FTSE All Share and the IMA UK All Companies sector, which have returned 125.14 per cent and 113.94 per cent respectively.  

Performance of fund vs sector and index over 10-yrs



Source: FE Analytics

M&G Recovery holds corporates that are popular with other funds in the IMA UK All Companies sector in its top-10, such as GlaxoSmithKline, HSBC and Royal Dutch Shell in its top-10 assets. 

While Richard Hunter, head of equities at Hargreaves Lansdown, thinks that BP – the fund’s largest holding – is most certainly a recovery play, he has reservations over the other two companies in the top-three.  

"I wouldn’t call [GlaxoSmithKline and Shell] recovery plays," said Hunter. 

"Neither of them have had a dramatic fall in shares price recently because neither of them have had to deal with a major disaster. Both have been pretty steady." 

Fund's top-10 holdings 

Rank	Stock	% weighting
1	BP	5.7
2	GlaxoSmithKline	5.3
3	Royal Dutch Shell	5.2
4	Tullow Oil	4.1
5	HSBC Holdings	3.9
6	Unilever	3.2
7	Prudential	2.5
8	National Grid	2.4
9	First Quantum Minerals	2.4
10	Kenmare Resources	2.1

 
Source: FE Analytics  

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Kerry Nelson, managing director at Nexus IFA, believes investors cannot write M&G Recovery off as a recovery fund, despite its size.

"Perhaps it may not be seen as a recovery fund to the extent that it used to be – we know that it’s no longer a nimble and 'go-anywhere' fund," she said. 

"The M&G Recovery team still maintains the same recovery philosophy and it is certainly not an index hugger, like many of the growth funds out there." 

In a recent FE Trustnet article, Rowan Dartington’s Tim Cockerill said that he would choose M&G Recovery as his favoured recovery fund to cash in on a rally in UK markets.