M&G Recovery, which is headed up by FE Alpha Manager Tom Dobell, is one of the best known UK equity funds. While the now £6.9bn fund has a very strong track record, it has somewhat disappointed over recent years.However, instead of chopping down his holding, Morgan – pension and investment analyst at Charles Stanley Direct – says that now is the perfect time to buy or add units to the fund because he expects Dobell’s strategy to bounce back.
“I do believe in Tom Dobell’s strategy,” Morgan said. “It has lagged recently, but the fund has performed very well over the long-term and Dobell has a good track record of unearthing hidden gems, which, although may have an element of gloom around them, have gone on to recover.”
Morgan isn’t alone in backing the fund, as Hawksmoor’s Richard Scott recently told FE Trustnet that he too has re-established a position in it.
Dobell is one of the longest serving UK managers, having taken over his M&G fund in March 2000.
FE Analytics data shows it is a top quartile performer in the highly competitive IMA UK All Companies sector over that time with returns of 166.93 per cent, more than double the amount made by the FTSE All Share.
Performance of fund vs sector and index since Mar 2000
Source: FE Analytics
That outperformance has also been very consistent as well. Our data shows that under Dobell’s management, M&G Recovery beat both the average fund in the sector and the All Share in each calendar year between 2000 and 2009.
That relative performance has dropped significantly over recent years, however.
The fund failed to beat the sector or index in 2011, 2012 and 2013. Cumulatively, that means the fund is one of the sector’s worst performers over three years, even though it has returned 21.89 per cent.
Source: FE Analytics
Morgan says that there have been a number of contributory factors that can explain why the fund has struggled more recently, none of which are a real cause for concern, however.
The major problem, Morgan says, is that Dobell’s style has fallen out of favour.
“If I were to try and encapsulate why the fund has underperformed, it would be that investors have been worried about companies that don’t have clarity of earnings,” Morgan explained.
“There has been a much greater emphasis on companies that are currently demonstrating earnings growth, and you can understand why. However, the problem is that this can be artificial. Their earnings per share could be improving due to cost-cutting or share buy-backs.”
“By following that approach, you could be missing out on stocks where the management is trying to develop the company over time.”
Morgan admits that it is a risky strategy to invest in companies that aren’t already delivering strong earnings growth, though as he has a long time-frame, he is happy to weather the volatility.
“Dobell holds a number of companies that are investing for the future and therefore could be in very good shape in five or 10 years’ time. However, that means that their earnings don’t look great at the moment.”
“There is still a cloud around these companies and people are unwilling to pay up for tomorrow’s jam today,” he added.
Dobell told FE Trustnet last year that the major driver of his fund’s underperformance had been his weighting to basic materials and oil and gas stocks.
According to FE Analytics, both of these sectors have vastly underperformed against the wider market over three years.
Performance of indices over 3yrs
Source: FE Analytics
Basic materials make up 6.64 per cent of the fund, while oil and gas makes up a further 17.96 per cent.
Some of the manager’s largest relative overweight positions include BP, Tullow Oil and First Quantum Minerals.
Like Dobell, Morgan says that the size of the fund hasn’t affected its performance, despite the fact that its AUM is close to £7bn.
“I would prefer it if it were smaller and obviously I don’t want to see the number of holdings creeping up, but as the fund hasn’t performed well there have been outflows. I would start to worry if the fund started performing well again and more people started buying it again,” Morgan said.
He adds that the fund’s size also helps Dobell's strategy of finding under-appreciated companies or turnaround stories.
“The fund is almost akin to a venture capital process,” Morgan said.
“The team is very, very involved with companies they invest in and once they have done their due diligence, they almost partner the management team. If they find a company they like, they are not afraid to take an extremely large stake, especially smaller companies where they can have between a 15 or 20 per cent stake.”
He added: “They have also been known to appoint, or recommend, board members so they have an influence in the company. Despite its poor performance in 2011, 2012 and 2013, M&G Recovery has started 2014 strongly.
It is a top quartile performer this year, with returns of 2.6 per cent. The FTSE All Share has posted a negative return over this period.
The fund requires a minimum investment of £500 and its clean share class ongoing charges figure (OCF) is 0.9 per cent.
