The £5.6bn fund, which has been headed-up by Tom Dobell (pictured) since March 2000, had been one of the darlings of the fund management industry – and for good reason. According to FE Analytics, it outperformed the FTSE All Share in each of the first full 10 calendar years that Dobell was in charge.
That stellar performance is still reflected in its longer-term numbers, of course.
Our data shows that since Dobell has run the fund, it has been a top quartile performer in the highly competitive IMA UK All Companies sector with returns of 138.9 per cent, beating its benchmark by more than 50 percentage points in the process. Performance of fund versus sector and index since March 2000
Source: FE Analytics
However, as the graph above demonstrates, that relative performance has waned quite substantially over recent years.
In fact, data from FE Analytics shows it has been bottom quartile and fallen short of the index over one, three and five years. That isn’t because of one or two bad years either, as it was third quartile in 2011 - though it narrowly beat the sector, it was down against the index - bottom quartile in 2012 and 2013 and is currently bottom quartile so far in 2014 with losses of more than 8 per cent.
Source: FE Analytics
Investors should always expect active managers to go through periods of underperformance, of course, as certain investment styles will fall in and out of favour during the course of an economic cycle.
That being said, Dobell takes a value approach to the market and will aim to buy stocks “that are out of favour with the stock market where he believes a good management team is making concerted efforts to turn the business around”.
As a result, regular commenters on FE Trustnet have voiced their concerns about the fund’s recent numbers as it has, for whatever reason, underperformed in what has generally been a “recovering” market.
The major question, therefore, is whether investors who experienced the good times with Dobell should expect them to come around again or are they right to have lost patience and look for other options?
Mike Deverell, investment manager at Equilibrium and a member of the AFI panel, thinks investors should do the latter.
Deverell is a firm believer that investors should pick funds to play a particular role within a portfolio, but following the recent performance of M&G Recovery he says alarm bells have started to ring.
“We are former holders of the fund and made the decision to switch out in March,” Deverell explained.
“It has been a great period for recovery funds as when you look at the likes of Schroder Recovery and CF Miton UK Value Opportunities, they have done really, really well. M&G Recovery just hasn’t doesn’t well in an environment that you expect it to. We are all about fund behaviour, so what does that tell us?”
One of the major concerns that investors have had with the fund is its size. It grew substantially during the years it outperformed reaching £8bn in 2012 and that figure has fallen consistently since.
Dobell has, on a number of occasions, defended the size of his fund and said that the relative lacklustre returns were due to stock and sector specific issues. In a recent update to investors, Dobell addressed this issue.
When asked whether the fund is too big, he said: “I’ve heard this question a number of times over the years and the answer remains the same: No, emphatically not.
“We acknowledge that we have underperformed over recent years, but I don’t think we can hide behind fund size as an excuse for some poor stock selections.”
Dobell attributes his underperformance to his weighting to non-FTSE All Share stocks which haven’t performed recently as well as high quality stocks – an area he has very little exposure to.
Deverell has sympathy with that view as he says Dobell’s high weighting to oil and gas and basic materials will have hurt him over recent years. Deverell also says Dobell’s positioning was a major reason behind his decision to sell as he didn’t agree that commodity-related companies were going to bounce back.
However, Deverell was not comfortable with the size of the fund either.
There is no exact science to show how much a fund’s size impacts its performance.
However, as the graph below shows, the fund’s alpha generation relative to the FTSE All Share has consistently fallen since mid-2009. This graph looks at the fund’s alpha over rolling three-year periods, which helps to smooth out the impact of an individual year’s performance.
During that time the fund had been £3.5bn, growing more than double that amount over the following couple of years until Dobell was hit with outflows in February 2012.
Fund’s alpha generation relative to index over 10yrs
Source: FE Analytics
“I do think recovery funds need to be very flexible, by which I mean they can go where the value is. The bottom line is, it is too big to be a recovery fund,” Deverell said.
Despite that, Dobell says his weightings to large, mid and small-caps hasn’t really changed over the years he has been running the fund, therefore challenging the claim that the portfolio is less nimble than it used to be.
Ben Willis, head of research at Whitechurch, takes a slightly more balanced view on the fund, however, and says long-term supporters shouldn’t rush to sell just yet.
“We still have M&G Recovery on our panel, but we are close to throwing the towel in,” Willis said.
“I do sympathise with why people would want to sell, but I don’t think you become a bad fund manager overnight. While I fully appreciate why investors have lost patience, the worry is that you sell then he gets his house in order and starts outperforming again like he used to.”
Willis points out that investors should only be looking to hold the fund for the long term and Dobell doesn’t attempt to beat the market every year, so he can possibly be given a little more time to turn performance around.
He also disagrees that size has been the major driver of the M&G Recovery’s recent lacklustre returns. However, he says that as its underperformance has more been down to portfolio positioning, it is almost a bigger concern.
“I think it is more down to stock selection really as he has had quite a bit in the oil majors, but it does seem to be one stock issue after another. His biggest holding is BP [which makes up 8 per cent of the fund] and that will have crucified him this year.”
Performance of stock versus index in 2014
Source: FE Analytics
Simon Evan-Cook, fund manager at Premier, has a similar view to Willis.
Evan-Cook rates Dobell highly and still thinks the fund can outperform over the longer term. However, as he has told FE Trustnet in the past, he says the size of the fund has and will continue to affect its return profile.
By that he means that when the fund was smaller, Dobell could deliver outperformance from numerous alpha generating themes.
Now the fund is much bigger, Evan-Cook says it is only really likely to significantly outperform the sector and index when M&A activity picks up due to the nature of businesses Dobell tends to invest in.
He therefore says that though the fund can outperform, it might take longer for those numbers to come through.
