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Buy, hold or fold: M&G Recovery jumps into the top decile over 2016

07 December 2016

After several years of underperformance, M&G Recovery is back at the top of its sector. FE Trustnet finds out what the experts think of the popular fund.

By Gary Jackson,

Editor, FE Trustnet

 
Following a bounce back in the value style of investing, the £3.4bn M&G Recovery has moved into the IA UK All Companies sector’s top decile after making a return of more than 16 per cent year-to-date. But should investors return to the fund or should the underperformance of previous years warrant them keeping their distance?

Even after its recent lacklustre years, M&G Recovery has a strong long-term track record. Since Tom Dobell took over the portfolio at the end of March 2000, it has made a 166.50 per cent total return – putting it in the peer group’s second quintile and outpacing its FTSE All Share benchmark by around 60 percentage points.

That said, recent years have proven to be more difficult for the fund as the value style of investing underperformed the growth style significantly, the portfolio suffered considerable outflows (assets under management were around £7bn at the start of 2014) and it was hit by some stock-specific issues such as heavy falls in First Quantum Minerals and Tullow Oil when commodity prices slumped.

Performance of fund vs index over 5yrs

 

Source: FE Analytics

As the above chart shows, the fund’s 28.68 per cent total return has been about half of the FTSE All Share’s gain over the past five years while it languishes at the bottom of the IA UK All Companies sector’s last decile by being ranked 239th out of 242 funds.

Speaking to FE Trustnet earlier in the year, Dobell said: “It’s definitely been a tough time for us. The last four years have been ‘challenging’ to use the popular phrase. 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.”

However, 2016 has seen a turnaround for the fund as it has been one of the sector’s best performance, aided by the resurgence of value investing over the year.


Since the start of 2016, M&G Recovery has made a top-decile 16.16 per cent return – ranking it 13th out of 267 funds in the sector. It has also beaten the FTSE All Share’s 10.65 per cent, something that many active funds have failed to do.

Richard Troue, head of investment analysis at Hargreaves Lansdown, says owners of the fund should be encouraged that Dobell stuck with deep value approach through the period of underperformance and suggests now could be a better time for value funds.

Performance of fund vs index over 2016

 

Source: FE Analytics

“The fact performance has improved suggests the process is not broken, but like all fund managers it is prone to periods of underperformance,” he said.

“There is still a long way to go before investors are likely to be happy with performance again, such was the extent of the poor patch, but I do think there is the potential for strong returns going forward.”

“I like the approach of topping up an investment after a tough period and now the fund has shown some signs of turning around it could be a good time to add with a long-term view.”

Troue adds that, given the fund has such a distinctive approach, it could make sense to combine it with one doing something different, such as a growth-focused strategy like the top-performing CF Lindsell Train UK Equity fund.

Simon Evan-Cook, senior multi-asset manager at Premier Asset Management, says M&G Recovery is seen as “the poster child for UK value investing”, but this means its underperformance was closely watched when market conditions were against this style.


“But this year, investors have moved from being certain that deflation was here to stay to at least allowing for the possibility that reflation may be on the cards. This has suited value investing, and M&G Recovery with it. And if investors continue to move towards reflationary expectations, that will provide a tailwind to the value style,” Evan-Cook said.

Performance of investment styles over 2016

 

Source: FE Analytics

“In terms of our own positioning, we hold a balance of styles, but as value underperformed and quality-growth became more expensive, we gradually shifted the balance of our portfolios towards value funds. And this is where we remain today. So yes, we think it’s a good time to be invested in funds like M&G Recovery.”

“However, we don’t hold that particular fund, as we have funds that do a similar job for us but are smaller and therefore in a better position to take opportunities wherever and whenever they arise.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.