Investors could see a huge bounce back in the M&G Recovery fund after a “tiresome” few years, according to Tom Dobell, manager of the beleaguered titan fund, who says increased bid activity and a partial recovery in commodities should support its re-rating.
While the past few years have been a generally supportive time for active UK equity funds, Dobell’s £4bn portfolio – one of the most well-known by investors – has been a disappointment for many of its holders.
It is down 9.11 per cent over one year, just up over three years and has only grinded out little more than quarter of what the average IA UK All Companies fund has returned over five years.
Performance of fund, sector and index over five years
Source: FE Analytics
It is also underperforming the FTSE All Share over 10 years and it is now the second worst performing portfolio in the 250-plus IA UK All Companies sector over one and three years. It is the third worst over five years.
It has also failed to beat the returns of its sector and benchmark in every full calendar year since 2009, the year when risk assets started rallying following the nadir of the financial crisis’ effect on markets.
Dobell says 2014, when the fund fell 9.59 per cent while the sector and index made a small gain, was tough as the fund took a huge hit from its oil-related holdings and other commodity stocks due to a significant amount of risk aversion. But he maintains this has only rendered its unit price cheap.
“There will be no change of strategy in the fund. Last year was very tiresome but 2015 is more stable and the fund is actually very cheap,” he said.
The largest holding in Dobell’s portfolio is BP. It has lost almost a third of its value since June 2014 and, as the graph below shows, the fund has had a strong correlation to the stock.
Performance of fund, stock and index since 26 June 2014
Source: FE Analytics
The oil giant, which makes up 6.5 per cent of the fund, has suffered from the broader weakness in the oil price since the middle of last year but Dobell says he is sticking with BP as he is expecting a long-term rebound.
“BP is an extraordinary business. It has responded in a heroic way to the oil spill crisis and its integrity has been exploited," the manager said.
“But the culture at BP has changed, it has stretched every sinew in its body. Its asset positioning is sorely undervalued by the UK equity market. It has been an extremely difficult investment for us, but I believe it has outstanding recovery potential over the next few years.”
However, the manager has trimmed some oil and gas exposure, which at a total 12 per cent is at its lowest for at least three years, according to our data.
The same can be said for basic materials – another term for other commodity stocks – which is currently at a three-year low of a 4.92 per cent.
Dobell said: "We still believe the poor performers have substantial potential. Many of them have been put through the mangle and unsurprisingly commodities have caused us problems."
The manager also believes a rising tide of bid activity for mergers and acquisitions is apparent and likely to boost markets broadly as well as specific holdings in his fund.
“There have been thin pickings for M&A funds in recent times,” he said. “In the last three or four years there has been very little activity to speak of at all.”
“That is starting to change and we are beginning to see transactions across the market. This has been extremely helpful for our type of investment and is starting to filter through to the fund.”
So far, despite a volatile few months, it has already been a mammoth year for M&A activity with the highest levels of corporate activity globally since 2007.
While Dobell’s performance in recent years has been poor compared to his peers, it is worth pointing out that the fund has a long-term strategy and since he took over in 2000 it is ahead of both its sector and benchmark.
Performance of fund versus sector and index since 2000
Source: FE Analytics
M&G Recovery also outperformed both the sector and index in each of Dobell’s first 10 years in charge.
SG Wealth Management’s Neil Shillito recently told FE Trustnet that he thinks Dobell’s consistent investment method is one reason not to sell, despite it not working as well in recent years as it has done in the past.
“He’s an outstanding manager and has remained consistent in his investment style – it just seems that the last few years haven’t been kind to him,” he said.
But FE Trustnet recently took a look at Dobell’s recent underperformance and found patience had worn thin with the likes of Premier’s fund of funds manager Simon Evan-Cook and Whitechurch Securities head of research Ben Willis, who both sold the fund a few years ago and are not looking to buy back anytime soon.
The fund has clean ongoing charges figure of 0.91 per cent.