Tom Dobell’s fund focuses on companies the manager thinks are undervalued and have scope to rapidly re-rate, which means it tends to underperform before they recover.
Morgan says investors should consider picking up the CF Lindsell Train UK Equity fund, headed up by star UK equity manager Nick Train to hold alongside M&G Recovery to smooth out returns in periods when Dobell's fund underperforms. "You would want a UK fund to complement the UK exposure from M&G Recovery. Something like the Lindsell Train UK Equity fund would dovetail well," he said.
"It’s also taking a long-term view and has a long holding period. But it’s not a recovery fund. It buys quality."
"Lindsell Train UK Equity would complement a recovery fund. It invests in a different set of stocks. [M&G Recovery] does have more unusual, esoteric stocks, so you want something more plain vanilla than a recovery fund."
Morgan adds that while the funds are not polar opposites, they tend to bring something different to the table in similar market conditions.
"Lindsell Train will do really well when quality companies are in favour. You can expect it to behave differently from a recovery fund. It has the characteristics of lower volatility and will outperform somewhat in down markets, though that hasn’t been the case in the last couple of years. But you would expect it to outperform in normal circumstances."
The long-term outperformance of FE Alpha Manager Tom Dobell’s M&G Recovery fund has made it one of the biggest portfolios in the UK market, with more than £7bn in assets under management.
However, it has struggled recently, underperforming its peers in the IMA UK All Companies sector over one, three and five years.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
The Lindsell Train portfolio has been a more consistent outperformer in the IMA UK All Companies sector, beating its peers and the FTSE All Share over one, three and five years.
Since launch in July 2006 it has made 133.77 per cent, more than double the returns of both the sector and index, according to FE Analytics. It is yielding 2.14 per cent.
Performance of fund vs sector and index since launch
Source: FE Analytics
It has also effectively protected capital in troubled markets over the last several years, according to FE Analytics data.
In 2008 the fund lost roughly a quarter of its value, but it was still slightly better off than M&G Recovery and well ahead of its peers in the sector.
In the down markets of 2011, Lindsell Train UK Equity gained 1.14 per cent while the sector lost 7.04 per cent and the index shed 3.46 per cent. M&G Recovery lost 6.29 per cent that year, according to FE Analytics.
The fund has also gained momentum in line with the recovery in the UK, delivering top-quartile returns in 2012 and so far in 2013.
Morgan says the £700.3m Lindsell Train UK Equity fund is a good counterweight to M&G Recovery in that it tends to invest in larger, quality firms while Dobell’s fund favours medium and smaller companies.
For example, the largest holdings in Train’s fund are FTSE 100 names such as beverages giant Diageo, consumer goods firm Unilever, multi-national publisher Pearson and Bristol-based financial services firm Hargreaves Lansdown.
M&G Recovery, on the other hand, has a handful of FTSE 100 names in the top-10 and those tend to be ones facing trouble, such as Tullow Oil and BP, which has been overshadowed by negative press from the Deepwater Horizon oil spill in April 2010.
As Morgan mentioned, the Lindsell Train fund can offer investors solid gains while keeping a lid on volatility. Over the last five years, it has an annualised volatility score of 13.61 per cent, making it more stable than the sector, the FTSE All Share and the M&G Recovery fund.
Food producers and telecommunications, media and technology stocks dominate the Lindsell Train fund, with more than 60 per cent of the portfolio invested in these two sectors. Train recently told FE Trustnet that there are still opportunities in UK equities despite the recent bull run.
Investors can access CF Lindsell Train UK Equity via some platforms. Charges are dependent on the platform agreement with the fund house.
