The £4.4bn M&G Global Basics fund finished 2012 in the bottom quartile of its IMA Global sector thanks to heavy mining and emerging markets exposure, and is bottom quartile in 2013 so far.
Investors have started to pull their money out, with the fund the fourth most-sold over the past 12 months, according to FE Analytics data.
French says he should have switched out of mining sooner, although he remains committed to the emerging markets theme in his fund.
"All I can say is: 'we apologize'. My money is in this fund, my parents’ money is in this fund and it was bad fund management. I cannot apologise enough," he said.
"I think M&G should be applauded for making an official apology and we have now moved on."
FE Analytics data shows that the fund suffered in the sell-off of mining shares last year, finishing 2012 with returns of just 1 per cent.
Performance of fund vs sector and index in 2012
Source: FE Analytics
The manager said that the result could have been a lot worse if he hadn’t acted sooner.
"Last summer taught me 'don’t panic' – but if you do panic, panic first," he said.
"The holdings in commodity stocks, mainly in Australia, we sold out of immediately, and we took a hit on our shareholdings as a big owner, but we took the hit early, which is why the fund has produced positive returns when a lot of our competitors in the space have produced negative returns."
This year, a slowdown in emerging markets and the outperformance of more cyclical areas has provided another headwind for the fund, which has made just 4.17 per cent while the IMA Global sector has grown 15.85 per cent.
Performance of fund vs sector and index in 2013
Source: FE Analytics
"The last 18 months have been challenging for this fund, but investing in equities, one has to keep a long-term view," French commented.
"There are times like 2008 when opportunities arise and that’s not the time to hide but to believe, having had tremendous tailwinds for the first decade of this fund when everything was in our favour – emerging markets, commodities leading that growth – what we have seen over the last 18 months was quite a significant rotation away from commodities to food, agriculture, and towards media and technology companies and financials further up the curve."
"This has been dramatic and one of the reasons this fund has underperformed the index over the last year."
"Materials and mining and emerging markets have been just about the worst place to be invested. This fund could have quite easily produced a negative return of 20 per cent had it remained static and not fluid."
"Commodities now in this fund are a smaller contributor to performance, but were significant for the first 10 years."
French says that he understands the concerns of some investors about the fund’s performance, but that for a fund with the concentration it has – on basic industries and emerging markets growth – it has actually performed reasonably well.
Those investors who compare it to the majority of funds in the Global sector, which focus more on the developed world and timing the market cycle, would be better off in a different fund, he says.
"What we have ended up with in this fund is three types of investor," he said.
"First, those who are in this fund for commodities exposure; secondly, those who are in it as a proxy for emerging markets; and thirdly, those who want a world fund. It’s that third group who we have to answer to."
"They are the group who are disappointed over the last 18 months; the first two groups I think are happy."
"The two main detractors from performance have been our underweight in the US and technology. That has been where the drag has been."
"Can we invest in tech and financials? I’m not very good at looking at banks and technology. I am too old to know what the latest trend is in tech."
"I would urge people who are in this fund in the hope it will invest in technology and banks to look at other funds."
"The fund has seen redemptions," he added. "And this is the first time I have experienced that. It means the big holdings have become even bigger as outflows have accelerated."
"It’s unusual for me to have this experience. We have ended up with a fund with a high concentration in its top-10 – every single one has been travelling well."
"We still remain upbeat about global growth and demography: one of the big themes in emerging markets will be healthcare."
French explains that he is moving the fund up the curve, from the more basic industries involved in metals and mining into greater value-added sectors in areas such as healthcare, which feed off a growing emerging market middle class.
He gives the example of GI Dynamics, an Australian company that sells the EndoBarrier, which is used to help obese people lose weight.
The product is inserted in the stomach without surgery and has produced positive results: the company is applying for licences in various developed and developing countries.
French says the evolution of his fund will be slow, however, and investors should not expect him to jump into cyclical areas that are doing well in search of short-term performance. The focus remains on long-term returns.
Its recent performance has dragged down its numbers over five years, which are also fourth quartile. However, over the past decade it is still top-quartile, having made 194.27 per cent.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
"The problem with this industry is that a fund is always compared to the new area, so historically we were compared to commodity funds and gold funds when they were doing well. When they collapsed, we were compared to emerging market funds, then to Japan or tech funds."
"The point being that this fund is there just to provide good positive compounded growth."
"It’s just going to slowly evolve and that means going from 40 per cent in commodities to nearly 10 per cent. The evolution into healthcare will be something we will do slowly and very selectively, with attention to valuations."
