“For the avoidance of any doubt we are not changing the way we run this fund,” Tom Dobell, manager of the M&G Recovery fund told investors. .png)
At his latest presentation, the manager accepted that the fund has struggled over the last few years, with investors fleeing risk towards ‘safer’ equities such as the large FTSE 100 stocks.
“We remain largely away from the FTSE 100 – arguably the country’s most successful companies -with about 48 per cent in the FTSE 100 at the moment against 80 per cent for the index,” he said.
This has led to a pretty bleak track record for the fund, which sits in the bottom quartile among its peers over one, three and five years.
Performance of fund vs sector and benchmark over 4yrs
Source: FE Analytics
As the graph above shows, the fund has returned 7.45 per cent over the last four years, while the FTSE All Share has risen 37.44 per cent and the sector has averaged 45.42 per cent.
The £3.3bn fund, which peaked at £8bn in assets under management as recently as 2012, has been the worst performer in the sector over the period.
This is in stark contrast to Dobell’s earlier track record on the fund.
According to FE data, during Dobell’s first decade as manager of M&G Recovery (March 2000 to March 2010) it was top quartile performer and beat the FTSE All Share by more than three times with returns of 100 per cent.
What was most impressive, though, was the consistency of that outperformance. Indeed, the fund beat both the sector and index in 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008 and 2009.
Performance of fund versus sector and index
Source: FE Analytics
However, as the value investing style has fallen out of favour, M&G Recovery has plummeted to the bottom of the sector performance tables.
“It’s definitely been a tough time for us. The last four years have been ‘challenging’ to use the popular phrase,” Dobell said. “That is the record that we’ve got - I know it’s not particularly pretty but it is what it is.”
“We’re long term investors, bottom up stock pickers - It’s not particularly glamorous there are lots of sleepless nights and the performance of the fund over the last few years has definitely been under pressure.”
“You can see that since mid-2012 the fund has been in decline relative to the market but we’re having a slightly better year this year.”
Indeed, in 2016, the fund has been an above average performer, returning 8.24 per cent, though this is still 1.58 per cent behind the FTSE All Share.
“Year to date we are still lagging the market but it’s not quite as serious as it has been over the last three years or so,” Dobell (pictured) said. 
“It’s been a very interesting but challenging year. We’re currently about 1.5 per cent behind the market which frankly in the circumstances isn’t very much.”
Despite the underperformance of recent years, however, Dobell says he will not change his strategy, which focuses on out of favour companies with management structure in place to turn the business around.
The example he gives is HomeServe, a ‘stage three’ company – by which he means one that he bought at the bottom (stage one) helped through the smoothing out process (stage two) and is now beginning to sell at a large profit (stage three).
“A good example of a stage three company is Homeserve. This company was battered by the actions of the FSA in 2011. It had a whistle blower essentially snitch on them to the regulator and it was equivalent to being hit in the face by a cricket bat - it wasn’t very pretty,” Dobell said.
Performance of stock over 7yrs
Source: FE Analytics
The firm went from a £1.5bn company to one with a sub-£500m market capitalisation almost overnight, leading to a lot of “unpleasant consequences”.
However, the household insurance company has turned things around in recent years and currently has a market cap of £1.7bn, above its previous highs.
“They’re now rebuilding and Richard Harpin the chief executive has done an excellent job, they’ve regrouped, brushed themselves down and it’s a great example that I would use to any other company going through these issues,” Dobell said.
“The US business is now bigger than the UK business and I think this company is starting to thrive. Things that are worthwhile just take longer.”
One such company going through changes at the moment is Balfour Beatty, the £2bn infrastructure company.
Dobell says he has been invested in the company for three years, trying to help it rebound, but admits that is “has not been an easy one”.
Over this time, the company has had issues including profit warnings and cash flow problems, but Dobell sees a turnaround beginning to take shape.
Performance of stock over 3yrs
Source: FE Analytics
Over the last three years, the company has struggled, particularly at the end of 2014 and immediately following the EU referendum, but has picked up since.
“Balfour Beatty has had all sorts of profit warnings, management problems and cash flow issues, but I think under Leo Quin we’re now starting to make some progress,” he said.
“The business has been cleaned from the bottom up, they’re making a far better fist of cash flow and they’re beginning to win some new contracts which have been in the news recently.”
“The technical expertise that these people have got is unprecedented and I think it is a good business long term.”
Now above its price three years ago, Dobell expects the company to cycle through the stages to allow him to invest in other opportunities, which he says are plentiful in the market at the moment.
“Every company goes through its difficulties and problems. What we try to do is find mispriced risk and I think today there is more of that around than ever seen before,” he said.