I find it somewhat ironic that M&G’s recovery fund is currently looking for recovery itself. In the past few weeks I have been struck by the amount of people asking me if it is a sell. My answer is a resounding no.
It must be galling for Tom Dobell, the fund’s manager, to hear stories like this. He assumed responsibility for the fund on 31 March 2000, since when he has guided the fund through the fallout from the technology bubble and the global financial crisis. Two years of weaker performance since has many investors questioning his calibre or suggesting the fund has grown too big.
Of course he categorically denies both and so he should. An active manager paying little attention to the composition of the benchmark index will experience periods of underperformance from time to time. Unfortunately patience is often in short supply nowadays in the investment markets and this could prove to be a costly mistake for many investors.
I caught up with Dobell last week for the first time in around a year. I was glad to hear his story has not really changed. He reiterated the fact that while he was not trying to pick out the next takeover candidate, M&A activity had been historically beneficial for the fund.
Over the past few years though there has been little activity in this department which has not helped performance. This probably had a lot to do with the financial crisis as companies themselves had a fit of jitters and weren’t keen to expand. Indeed, the focus was at the other end of the scale, on cutting costs rather than spending money on acquisitions and expansion.
Personally I believe this might be changing. If M&A activity does pick up it could provide a shot in the arm for the fund given the number of undervalued companies Dobell believes he owns. He believes there are many candidates that would ordinarily have been taken over by now, but have been hampered by the economic environment.
I would stress again though that Dobell does not pick stocks on the basis they might be subject to M&A activity. Rather, he invests in vulnerable companies that for a number of reasons he believes have been mispriced. He suggests financial ratios are generally looking low on these types of company and they are as cheap as they have been in the past five years.
The fund’s present position sees it with 50 per cent invested in FTSE 100-listed companies. This is an investment decision based on where Dobell sees the best value, not one that has been made on the basis of liquidity. A further 20 per cent of the fund is held in other UK-listed companies, of which around half are quoted on AIM.
At the sector level around 19 per cent of the fund is invested in 12 oil and gas companies, including some larger firms. This includes an overweight position in Tullow Oil which itself has had a difficult period. Indus Gas is a $2bn Aim-listed company which the fund owns 7.5 per cent of. The company has significant quantities of gas reserves which it hopes to turn into liquefied natural gas for export. Lamprell is a new holding in the sector where a new management team has come in after four profit warnings.
Elsewhere, Dobell remains cautious on financial companies, holding 19 per cent in the sector compared with a 24 per cent weighting in the index. He admits being six months too slow in realising the recovery potential of Lloyds where he initiated a position at around 50p after it had already risen from its lows. Holdings in Prudential and the Lloyds of London Insurance vehicle have been OK. A purchase of Aviva has also been made as a new CEO came in.
Overall, I remain a fan of the fund and retain my faith in Dobell. Under his tenure the fund has risen by 152 per cent compared with 73 per cent for the FTSE All Share index and 69 per cent for the average fund in the IMA UK All Companies Sector.
Such strong performance probably carries little weight with momentum investors who jump out at the first sign of underperformance. Dobell quite rightly won’t change his process though. He is one of the most dedicated fund managers I know and I will look to top up my holding in his fund over the next few weeks on any further weakness.
Mark Dampier is head of research at Hargreaves Lansdown