Dobell’s M&G Recovery fund was one of the most consistent outperformers in the IMA UK All Companies sector for many years. Dobell, who took over the fund in March 2000, beat the sector in each of his first 10 years as manager.
This means that M&G Recovery was the 13th best performing portfolio in the sector over his first 10 years, with returns of 100 per cent, beating the FTSE All Share by 70 percentage points.
Performance of fund vs sector and index Mar 2000 to Mar 2010
Source: FE Analytics
However, the now £7bn fund’s performance has tailed off significantly since then.
It dropped into the third quartile in 2011 and was a bottom quartile performer in both 2011 and 2012, meaning that the fund has now underperformed against its benchmark and sector over one, three and five years.
Scott, who is senior fund manager at Hawksmoor, says that now is a good time to add exposure to the fund because the stocks Dobell holds should now start to outperform.
“We held M&G Recovery in some of our client portfolios for quite some time, but we recently added it to our Vanbrugh fund of funds mid to late last year,” Scott said.
“Tom Dobell has outperformed in something like nine out of the first 10 years that he was in charge of the fund, but he has had a difficult period over the last two and half years or so.”
“However, due to the type of stocks he holds and the fund’s outlook, now it looks much better and should perform well on a relative basis and an absolute one as well,” Scott added.
In an FE Trustnet article last year, Dobell apologised for the performance of his multi-billion pound fund. He blamed stockpicking for the slump, but said he would be working as hard as ever to turn around its performance.
Like Dobell (pictured), Scott says that merger and acquisition (M&A) activity is likely to pick up from here. Scott says this puts M&G Recovery in a prime position and as a result he thinks the fund will bounce back.
“Dobell talks about the large number of stocks in his portfolio that have a large 'value gap' between the progress made in the underlying businesses and the failure of this to be recognised by the stock market,” Scott said. “I think one thing that we are likely to see more of this year is merger and acquisition activity – many companies are cash rich, have access to cheap financing (via bond markets) and have managers who are starting to feel a bit more confident with the improved economy.”
“The types of companies held in M&G Recovery are likely to be among those sought out by acquirers, and this could be the catalyst to see a sharp upturn in the fund’s absolute and relative performance.”
Because of that, the manager says that he and his colleague Daniel Lockyer think that M&G Recovery is a good buy for the contrarian investor.
“Daniel Lockyer and I have often found our best fund purchases are those buying into funds run by great fund managers after they have been through a difficult period. We are optimistic that buying M&G Recovery now will be an example of that.”
“I hope so anyway,” he added.
Scott runs the Vanbrugh and the PFS Hawksmoor Distribution funds, having previously managed a number of global and Asia pacific funds at Exeter Investment Group.
Our data shows that Scott has returned 314.13 per cent since the turn of the century, beating his peer group composite by more than 125 percentage points.
Performance of manager vs peers since Jan 2000
Source: FE Analytics
While Dobell said that his fund’s recent poor performance was due to stockpicking, some investors have raised concerns that the slump could be due to the growing size of the now £7bn fund, which had more than £8bn in AUM a couple of years ago.
Dobell has been quick to deny this in the past, telling FE Trustnet in October 2012 that "size isn’t an issue” because he will always tend to be invested in large caps.
Ben Willis (pictured) who is head of research at Whitechurch, rates Dobell and agrees that his strategy can accommodate a larger amount of assets. However, he warns investors to be wary of the fund’s size.
“I think it is scalable, though that has been the major concern,” Willis said. “Dobell has a certain style and he is a buy-and-hold investor, normally holding stocks for about three to five years. He has suffered a bit recently though as he hasn’t been invested in the areas that have re-rated significantly.”
“His style has been out of favour recently as small and mid caps have driven, areas he doesn’t – and can’t really – have a large weighting to.”
“He has a tried and tested method, so I wouldn’t write him off, but I would have to keep an eye on the size because he will have built up some decent positions in stocks, so when he sells them the replacements he will look for may not be able to generate the same sort of returns,” he added.
Scott isn’t overly concerned by the size of M&G Recovery and even says its dominant position in the market allows it to help the recovery of the companies it invests in.
“The way they tend to invest, and try to extract value, means that they are never going to be the number one portfolio in the sector,” he explained.
“However, the process they use is suitable for a larger fund. They buy early, build up their position over time and readily engage with the people they invest in.”
“A classic example would be the pharmaceutical company Mesoblast, as they were responsible for putting two non-execs on the board. You can only do that if you have clout and have a large amount of assets,” he added.
Mesoblast is an Australian pharma that isn’t listed on the FTSE. However, it is Dobell’s 16th-largest holding, making up 1.84 per cent of his fund, which equates to £132m worth of stock. That means Dobell has around a 10 per cent stake in the business in his portfolio.
Some of his larger holdings include BP, HSBC and GlaxoSmithKline.
M&G Recovery has an ongoing charges figure (OCF) of 1.65 per cent and requires a minimum investment of £1,000.
