Within the financial industry there seem to be constant calls for simple products investors can understand. I am always intrigued by this. Unit trust funds, which have been around for decades, are relatively simple. Although the underlying investment process is hard to follow for some funds, there are also plenty of long-term, straightforward strategies. One example is M&G Recovery.
The fund was launched in 1969 and has been managed by only three individuals since, all of whom have maintained the same philosophy. Current fund manager, Tom Dobell, has been at the helm for twelve years and sees no reason to change what has been a successful strategy: Simply put, M&G Recovery looks to buy unloved businesses that have experienced setbacks, but with patience can be nursed back to health. Such companies, due to their chequered past, often have exceptionally low valuations, meaning any improvement in their situation can mean a large rise in share price.
However, a turnaround is never guaranteed. Inevitably, some businesses that get into difficulty go bust. Through his process of getting to know company management and working out who he can trust to deliver, Tom Dobell aims to minimise these cases. In his portfolio of approximately 100 holdings, he says it averages one a year. When it happens it is always disappointing, but it is all part of investing in this area of the market. What he aims to do is ensure a good spread of assets, and that his winners more than make up for the losers.
Adopting this approach is clearly a game of patience, something many investors today are lacking. Yet time and time again I find the best fund managers are those who take a long term view and where turnover on the fund is very low. Dobell looks at a five-year timeframe although he has had many companies in for much longer than this. He also looks to be a constructive and supportive shareholder, but not one that will unduly interfere with the business.
The long term nature of the fund can be seen in the variety of companies that make up the portfolio: around a third is in stocks such as Tullow Oil and Aggreko that have already recovered and are delivering good results for investors. The remainder of the fund is invested in companies that are at an earlier stage of the process. Examples include Irish building materials supplier, Kingspan, and Homeserve, a company that sells emergency repair services to households. In both cases the firms have been beset with problems in their domestic businesses, but Tom Dobell sees great potential in the expansion of their overseas operations.
Another notable feature of the fund is exposure to less well-explored parts of the market. A number of stocks listed on the Alternative Investment Market (AIM), the junior market of the London Stock Exchange are included, notably in energy and natural resources. Listing requirements are less stringent on AIM, so some investors treat stocks listed here with suspicion. However, Tom Dobell points out some companies choose AIM because it is less expensive. Some of these firms are large enough to be in the FTSE 250 and he believes there are outstanding opportunities.
Over the long term performance has been outstanding. Since 2000, when Tom Dobell took charge, the fund has risen by 121 per cent versus 38 per cent for the UK sector. However, more recently the fund has struggled, lagging its peers in 2011 and so far this year. This can be attributed to the outperformance of defensive, blue chip stocks such as Diageo and Unilever, which have become fashionable with investors due to the stability of their earnings. The fund holds none of these – they are not recovery stocks. Additionally the fund has no bank shares, which have also done well in 2012. This might surprise you as they would seem prime candidates for recovery. However, Tom Dobell doesn’t sufficiently trust management and argues their future is not in their own hands.
In a world where opaque structures can be found in many financial products, it is refreshing to reconsider this fund’s enduring, simple approach. It has stood the test of time, and I believe it will continue to do so. A further attraction is the possibility for merger and takeover activity amongst the fund’s holdings. Companies have been loath to spend cash given the current uncertain economic climate, but at some stage this is likely to change as they start to recognise the value in their competitors. Undervalued, unappreciated companies tend to make natural targets, so this fund would be a natural beneficiary of any upturn in activity.
Mark Dampier is head of research at Hargreaves Lansdown