Dobell, an FE Alpha Manager, has a stellar long-term record, but a poor 2012 and 2013 saw the fund slip behind both its sector and benchmark over one, three and five years.
Performance of fund vs sector and index
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| IMA UK All Companies | 27.09 | 44.12 | 55.17 | 135.52 |
| FTSE All Share | 23.64 | 45.04 | 55.47 | 147.22 |
| M&G - Recovery | 15.91 | 30.09 | 51.32 | 197.27 |
Source: FE Analytics
Huge inflows between 2010 and 2012 saw the size of the fund balloon from around £4bn to £7.5bn, which some experts have pointed to as a contributing factor to its recent underperformance.
Rathbones’ David Coombs recently highlighted how giant funds find it more difficult to buy and sell positions than their smaller counterparts, which can have a very telling impact on performance.
However, Dobell has shrugged off such claims, insisting that it is perfectly possible to find recovery stocks of all shapes and sizes with £7bn under management. "I'm not really interested in the size of the fund – my sole focus is and always has been delivering performance for our customers," he said in an exclusive interview with FE Trustnet.
"The M&G Recovery fund is now a little over £7bn in size and it has taken 44 years to get here. Ever since I took on the fund 13 years ago, I have been asked about the size of the fund. I don't recognise any issue over size for a recovery fund, at least not with our approach."
Dobell points out that the fund has significant exposure to small and mid caps, illustrating the adequate flexibility he has when choosing companies.
"We are long-term investors in recovery across the market cap spectrum," he explained. "We currently have a fund that broadly has 50 per cent in FTSE 100 stocks, 25 per cent in FTSE 250 and the remainder in AIM or non-benchmark positions – mainly listed in the UK."
"As genuine contrarian investors, we are buying when other investors aren't interested and stock is easier to come by. When a company has gone through the recovery cycle, we are selling when other investors are buying," he added.
One glance at Dobell’s top-10, and it is easy to see why critics question whether it is a true recovery fund. Companies such as GlaxoSmithKline, HSBC, Unilever and Shell are very popular choices with fund managers, and have delivered strong returns in the aftermath of the financial crisis.
Top-10 holdings of M&G Recovery at 31 May 2013
| Top-10 | Weighting (%) |
|---|---|
| BP | 6.4 |
| HSBC | 5.9 |
| GlaxoSmithKline | 5.5 |
| Shell | 4.1 |
| Prudential | 3.4 |
| Unilever | 3.2 |
| Easyjet | 2.8 |
| Tullow Oil | 2.6 |
| Invensys | 2.3 |
| Smiths Group | 2.1 |
Source: FE Analytics
However, the manager says such a sweeping view is unjustified, given the team’s definition of what a recovery stock actually is.
He commented: "All of the companies within the portfolio were recovery stocks when we first bought them."
"We look at four stages of the recovery cycle; from stage-one where companies are very much unloved by the market, through to a stabilising period, on to where they are recovering well, and then to maturity, from a recovery point of view."
Dobell says he only initiates a holding when it is in stage-one – "unloved" – and aims to have around two-thirds of the portfolio invested in stage-one and stage-two where the potential for returns is highest.
"The remaining third is in stage-three, where we are reaping the rewards through strong performance. In reality, we are already divesting once a company gets to stage-four," he added.
"I think sometimes, people expect all the companies to be in stage-one – that wouldn't make for very good portfolio construction."
Dobell points to the recent underperformance of the fund as a result of stock-specific issues, and the general risk-aversion in the market, which has seen "safe haven" income-payers perform much better than corporate recovery stories.
However, he says he still has total confidence in the stocks in the portfolio, and believes they have the potential to rebound very well given the recent underperformance.
"We have had a difficult time over the last year to 18 months," he said. "Over that time, we have had some fantastic successes."
"Risk-aversion in the stock market and some stock-specific issues have outweighed these – over the short-term, anyway."
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
"We feel very strongly that the portfolio is cheap. The market rally over the last year has been driven by so-called 'safe' stocks with greater certainty of earnings and cash-flows for the near-term. Companies like ours don't really fit into that category."
"This goes with the territory of recovery investing, I'm afraid. Stock markets are very good at assimilating data, but not good at all at understanding strategic value. We see an expanding value gap and, as genuine long-term investors, this is our opportunity."
The lack of M&A activity has also weighed on performance, Dobell added.
"Historically, we have had quite a few approaches and maybe half a dozen completed deals in a year – since the end of 2010, we have had only two," he explained.
"I should emphasise, we don't invest in a company to give away the upside to someone else, but typically, a more vibrant M&A environment makes investors more aware of the value in the market. I would expect us to benefit from such an environment, both directly and indirectly."
While Dobell says that in the past he has had to give up on companies that have not performed in line with expectations, during the recent bout of underperformance he has stuck with the vast majority of stocks in his portfolio.
"It is not often that we give up on a stock, but sometimes we realise we have made a mistake or the investment isn't going to scale in the way we hoped, or rarely, it is just too difficult," he explained.
"We operate a strict maximum of 100 stocks and we currently have 88, with a nightclub policy of one in, one out. This introduces an aspect of capital tension that disciplines us to constantly reassess the fund. We have no shortage of new ideas vying for a position within the portfolio."
"We have kept very close contact with the companies that have struggled over the last year. In the vast majority of cases, we have been reassured by the progress they are making and remain confident the investment is sound."
Although the fund has seen significant outflows of late – around £700m over the last six months, according to FE data – the manager says he is confident that the majority of investors in his fund will be patient with him
"We are long-term investors with a three- to five-year time horizon, often holding stocks for much longer," he said.
"The hopeless short-termism we see in the stock market is a frustration we must endure, for now. I believe our customers are generally more aligned with our own time horizons. I have always said this fund is investing for the mums and dads, saving for university fees, retirement or to pay off a mortgage."
"This fund was launched in 1969 and over that time it has had good years and bad. But the outperformance it has delivered to loyal investors is quite compelling."
Performance of fund since launch
Source: FE Analytics
FE data shows that M&G Recovery has returned an incredible 47,675 per cent since May 1969. No equity index on record has a track record going back that long, but the MSCI World index has returned 6,656 per cent since December 1969.
The fund requires a minimum investment of £500 and has ongoing charges of 1.65 per cent.
