Is dog fund M&G Recovery worth holding on to, or is it time to sell?

David Brenchley
26 September 2016

M&G Recovery was a long-time darling of the Investment Association's UK all companies sector, but its fall from grace has been rapid - and brutal for manager Tom Dobell.

Feted as a 'star' fund manager after steering M&G Recovery to outperform the stock market for 10 years in a row (between 2000 to 2010) Dobell's fortunes have taken a turn for the worse over the past six years.

The fund has been on a miserable run of form. M&G Recovery has been in the fourth quartile of its sector since 2012. It has gained just 21% over the last five years compared to the average fund in the sector returning 65%.

Its three-year performance is similarly bleak, with a loss of 2.8% compared to its sector's gain of 17.5%. Its 10-year performance, however, remains ahead of the market.


Improving performance

In a recent update to investors Dobell pointed out performance has improved in the first half of 2016. Indeed, it is currently ahead of its sector for the first time in five years, returning 8.7% year-to-date compared with the UK all companies average of 7.6%.

This places the fund in the second quartile of its peer group. Dobell says he is sticking to his guns and is confident the fund will bounce back sooner rather than later.

“It's definitely been a tough time for us [and] the last four years have been challenging,” says Dobell.

“For the avoidance of any doubt, we are not changing the way we run the fund - it is continuing to be run the way it has been run for the last 47 years.

“It's a very simple approach, it's unchanged and I make no apology for the fact that we're not changing our approach, which will be a comfort to some but obviously infuriating to others.”

Over the past couple of years a rush of money has flooded into 'bond proxy' type stocks. This has led to the likes of Fundsmith Equity and others putting in strong performance figures.

Dobell, though, believes the search for yield “has become extreme in its nature”, noting that those companies are currently trading on approximately 22 times earnings against a long-term average of 15 times. “Our performance has been under pressure while risk aversion has been very popular,” he asserts.

The manager urged investors to “forget the past [and] concentrate on the future, that's the only thing that we can really influence”.

“The brief is clear: we've got a mandate that encourages us to take risk and I've tried my very, very best to keep to the mandate that's been in operation for nearly 50 years. We are attempting to offer the other side of a crowded trade.”


Should you keep the faith?

Analysts are split on whether investors should keep the faith. For some time now M&G Recovery has made a regular appearance in Tilney Bestinvest's Spot the Dog list.

Jason Hollands, managing director of business, development and communications at Tilney Bestinvest, acknowledges Dobell's “more encouraging” performance over the last six months and that the fund's style of investment can “test investors' patience from time to time”.

However, the firm still retains a 'sell' rating on the fund, explaining it has a higher conviction in other funds such as Liontrust Special Situations.

In contrast, Hargreaves Lansdown retains the fund in its Wealth 150 list in the hope performance will turn around.

Mark Dampier, research director at Hargreaves, says he personally invests in the fund so is 'keeping the faith'. Dampier adds he agrees with Dobell that “at some stage the market will switch back to [the unloved] stocks” M&G Recovery favours. However, he warns investors not to expect much until then.

“The fund has had a very difficult few years,” Dampier adds. “Some of the initial problems were down to Tom and the fund was perhaps a victim of its own success by taking so much money.

“However, the fund is doing something very different and is not very correlated with many other funds, so it should be part of a portfolio of UK funds.”

Hollands says the size of the fund, which has declined from a peak of £8 billion to £3.3 billion today, has not helped its case given some of the smaller company positions will have been fairly illiquid.

“If the fund can stabilise performance and flows at this size, it should be a lot more manageable and hopefully begin the process of clawing back some of the lost ground. I would certainly love to see this fund leave our kennel,” he continues.

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