Dobell was one of the standout UK equity managers of the 2000s, leading his M&G Recovery fund to the top of the IMA UK All Companies sector over the 10-year period, with returns of 112.09 per cent. Huge inflows followed as a result, sending assets under management (AUM) close to £8bn at one stage. However, two years or so of underperformance have led many investors to pull their money out, sending AUM down to £7.1bn at the time of writing. FE data shows that M&G Recovery was a bottom-quartile performer in its sector in 2012 and so far in 2013. On a cumulative basis, it is now behind its sector over one, three and five years, and behind its FTSE All Share benchmark over one and three years.
Performance of fund, sector and index
| 1yr |
3yr | 5yr | 10yr | |
|---|---|---|---|---|
| FTSE All Share | 16.95 | 32.92 | 63.40 | 130.36 |
| IMA UK All Companies | 21.22 | 36.37 | 70.81 | 126.37 |
| M&G Recovery | 10.41 | 23.47 | 69.77 | 176.81 |
Source: FE Analytics
Yearsley accepts that Dobell has made a few mistakes along the way, but believes that automatically writing off the manager for a bad year or two is wrong – particularly given the kind of portfolio he runs.
He points out that the average holding period for stocks in the UK is now only six months, compared with just over a year at the turn of the millennium and over eight years in 1960. Like Dobell, Yearsley thinks a similar trend is being seen when trading in and out of funds.
"Whilst it has been through a period of underperformance versus its peers, a knowledgeable and talented fund manager is at the helm, so I still believe it is worth considering as a long-term holding, offering exposure to the UK stock market," he said.
"Investors have been far more attracted to companies with steady and predictable income streams rather than ones with less predictable revenues but important strategic value – including recovery stocks."
"The relative outperformance of these safer stocks has surprised him and he describes the current valuations of some of them as ‘batty’. To be fair, there has also been some poor stock-selection within the fund too, for which he apologises."
"However, he remains determined to stick rigidly to the approach that has served the fund well over most of its history."
It is important to point out that a number of recovery funds, including Schroder Recovery and R&M UK Equity Long Term Recovery, have had a much better time than M&G Recovery of late, showing that it has been possible to perform well with this style.
Performance of funds over 1yr
Source: FE Analytics
While income-producing stocks have in general performed better than recovery stocks over the period, Yearsley says that the nature of a fund such as M&G Recovery means it is always susceptible to periods of underperformance.
For that reason, he advises investors to be more patient.
"In its 44-year history, [the fund] has only had three managers, and the investment philosophy has largely remained the same: buy into unloved companies experiencing difficulties in the expectation their fortunes can be turned around."
"While high risk, this can be a lucrative strategy. Shares in companies experiencing operational or financial difficulties usually have depressed share prices, so if the company can be nursed back to health, gains can be impressive."
"This is often a slow process, hence the need for patience and a long holding period. It is very difficult predicting when catalysts will emerge to propel a company's share price upwards, especially in recovery situations. However, patience is often rewarded and I think that also applies to holding this fund."
Yearsley highlights BP as an example of a recovery stock in Dobell’s fund that has yet to bounce back. The company’s share price did surge in the months following the Macondo well disaster in 2010, but has not been the success story Dobell had hoped.
"Dobell (pictured) believes UK politicians have been slow to defend BP, which has so far paid out $42bn in compensation, selling $30bn of assets in the process," he said. "However, the company's cash-flow is still prodigious and Dobell believes that in time, the company can go on to thrive."
Performance of stock and index over 5yrs
Source: FE Analytics
BP is currently M&G Recovery’s biggest position, at 6.4 per cent. Other major positions that have disappointed of late include Tullow Oil and First Quantum Minerals, which are down 28.75 and 18.7 per cent over the last 12 months, respectively.
Some experts have voiced concerns about the size of M&G Recovery, believing Dobell’s lack of flexibility when it comes to buying and selling out of stocks quickly has contributed to the recent underperformance.
Yearsley shrugs off these concerns, arguing that Dobell’s long-term buy-and-hold strategy does not require high levels of flexibility.
He commented: "[Dobell] argues that with half of the assets invested in regularly traded FTSE 100 stocks, and the fund's extremely long holding period, size is irrelevant."
"His approach essentially involves buying unpopular stocks and selling them once they are popular again, so I believe size is less relevant than for an out-and-out growth fund."
The manager built on these points in an exclusive interview with FE Trustnet earlier this year.
M&G Recovery requires a minimum investment of £500 and has ongoing charges of 1.65 per cent. Dobell has managed it since March 2000.
