I have been asked the same question on a number of occasions over the past year: when will the M&G Recovery fund recover?
The fund was launched in 1969 and has been managed by only three individuals since, all of whom have maintained the same philosophy. Current manager Tom Dobell has been at the helm for 14 years and, until three years ago, it had performed exceptionally well.
Some commentators blame recent poor performance on the fund being a victim of its own success. With growing interest from investors, it ballooned in size. It is certainly true that a big influx of money can cause considerable indigestion for fund managers. However, this is a reason all too easy to give.
I have spoken to Dobell on a number of occasions over the last few years and I think he would admit he originally ran some of his winners for a little longer than he should have. The reality is, all good active managers go through poor spells.
Throughout my career, the same has happened with several talented fund managers, including Neil Woodford, Anthony Bolton and Angus Tulloch.
When this happens, it brings one key question into focus: as an investor, do you have real conviction in the fund manager? If you do, while periods of underperformance will prove unpleasant, you should at least anticipate that manager will make it through the ordeal at some stage, providing their process and philosophy remains unchanged.
The problem tends to stem from a lack of patience from portfolio managers and fund investors. After all, there will always be times when some funds do better than others.
The point of diversification is also to invest with managers with dissimilar styles, so that each fund within a portfolio fires at different times. This seems too quickly forgotten. For instance, there is too much pressure on today’s media to produce content; highlighting poor performance becomes an easy story to write.
I admit I can be accused of being patient far too long. This leads itself to another question I am often asked: when do you sell a fund that is struggling? I do not have a precise timescale but I have seen plenty of successful managers out of sorts for three years or more, who have subsequently made a comeback. It might feel uneasy at the time but sometimes doing nothing is the hardest thing to do when it comes to investment.
I highlight Dobell as he has recently received poor press for the fund’s holding in insurance claims processor Quindell. He seems to have suffered disproportionately more than others who have also held the stock. By his very nature, Dobell takes risks. He often purchases stocks nobody else will touch and herein lies the opportunity. That said, it does mean things will, and do, go wrong.
In the case of Quindell, the easy solution would be to walk away. Unlike many managers, Dobell is not frightened to get his hands dirty in order to get company management and corporate governance on the right track. The stock has cost the fund about 0.6 per cent but while the manager is not happy about this, it is not a disaster. He hopes to salvage the situation and time will tell whether this can be done.
Other areas that have had a tough time include the oil and mining stocks, some of which have close connections with Africa. The fall in commodities prices, such as iron ore oil, coupled with the Ebola outbreak has hardly helped sentiment towards these stocks. That said, with a portfolio of 82 holdings, I would expect to see some winners come through. Indeed, a bid for one of the portfolio holdings was made just a few days ago.
In conclusion, I still have conviction in Dobell. He is acutely aware the last few years have been difficult and is doing everything in his power to get through this rough patch for his investors. Periods such as this are part and parcel of recovery investing and a long-term outlook is essential. If you have real conviction in Dobell’s process, I would suggest holding on a bit longer. If I am right, the M&G Recovery fund will be a great recovery story in its own right.
Mark Dampier is head of research at Hargreaves Lansdown