In theory, the manager of a recovery fund should attempt to identify catalysts that will reverse the fortunes of a poorly performing company, based on their appreciation of the macro environment and more specific factors such as a change in management.
This definition is, of course, only a guideline, but popular FTSE 100 names such as Shell, Vodafone, HSBC and GlaxoSmithKline – which all appear in M&G Recovery’s top-10 holdings – are not traditional recovery plays.
The stellar performance of Tom Dobell’s fund is unquestionable: the £7.2bn portfolio has the best record of any fund in the entire unit trust and OEIC universe since its inception, and has also outperformed its FTSE All Share benchmark over three-, five- and 10-year periods.
However, its vast AUM prevents it from holding smaller and more traditional recovery growth stocks that are set for a big turnaround.
Marina Bond, manager of Rathbone Recovery, believes her £63.8m fund is more in line with what investors understand by the term "recovery".
"Our fund is a little bit different from most of our rivals in that we are smaller and have the ability to dedicate a big portion of our portfolio to small and mid caps stocks."
"If you look at our top-10, you don’t just have your traditional large cap stocks. We have a pretty strict process to ensure that the stocks in the portfolio are recovery plays."
The fund currently has 20 per cent of its assets invested in FTSE 100 companies. More than a third of the fund is invested in the FTSE 250, with the remaining exposure split between the FTSE Small Cap, AIM and European markets.
BG Group, Unilever and WPP are the only FTSE 100 stocks that appear in Bond’s top-10 holdings. In contrast, Kenmare Resources and First Quantum Minerals are Dobell’s only non-FTSE 100 stocks in his top-10.
Top-10 holdings of funds (as of December 31 2011)
| M&G Recovery |
Rathbone Recovery |
| BP |
Booker Group |
| Royal Dutch Shell |
BG Group |
| GlaxoSmithKline |
Anheuser-Busch Inbev |
| Tullow Oil |
Unilever |
| HSBC |
Senior |
| Unilever |
WPP |
| Kenmare Resoruces |
Synergy Health |
| First Quantum Minerals |
Paddy Power |
| Vodafone |
Hansteen |
| National Grid |
Hyder Consulting |
Source: FE Analytics
The likes of Schroder Recovery, R&M UK Equity Long-Term Recovery and SJP Recovery have a similarly large cap focus. FE Alpha Manager Mark Slater’s MFM Slater Recovery fund is the most similar to Bond’s vehicle.
Bond and her co-manager Julian Chillingworth target three different themes when selecting a stock: macro recovery, sector recovery and management turnaround.
"More often than not, more than one of these themes will be relevant to a stock that we hold," she said. "For example, we wouldn’t just hold a company because its share price will rise during a market rebound. There would have to be something else that makes us select it."
"Forensic analysis of the company’s financial results comes first, and then we spend a lot of our time meeting with the management and judging whether the company is in good shape. We don’t just buy a company because it’s cheap."
She points to Hyder Consulting – a multi-national consultant engineer company based in the UK, Asia Pacific, the Middle East and Europe – as a good example.
"Since it is a cyclical stock, it fell massively in 2008, but this wasn’t the only reason why we acquired it when the fund was launched in 2009," Bond continued.
"At the same time the business was being completely restructured by its new chief executive [Ivor Catto], who used to work at WS Atkins."
"It has always had excellent engineering skills, but the restructure has made the business far more client friendly. Just recently it has acquired an £80m contract in Qatar for five years, and it is well placed to secure future deals. This is a company I really think is going places," she added.
While the fund has a relatively low turnover of around 30 per cent per annum, Bond says sell-discipline is just as important as judging when to buy.
"If a chief executive resigns, there’s a bad atmosphere in the boardroom or we hear of a profit warning, then we look at the company closely and come to a decision," she explained.
Performance of recovery funds and index since July 2009
| Name |
Return (%) |
| MFM - Slater Recovery |
70.69 |
| Rathbone - Recovery |
53.47 |
| M&G - Recovery |
51.55 |
| R&M - UK Equity Long Term Recovery |
49.35 |
| FTSE All Share |
48.3 |
| PFS - Brompton UK Recovery |
45.08 |
| Stan Life Inv - UK Equity Recovery |
42.7 |
| Schroder - Recovery |
41.52 |
| SJP - Recovery |
29.62 |
Source: FE Analytics
Since the fund’s launch in July 2009, only Mark Slater’s vehicle has a better record than Rathbone Recovery. Bond has returned 53.47 per cent since inception, compared with 48.3 per cent from the FTSE All Share.