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Recovery positions

Recovery has been a key word over the past year – the recovery of markets, economies and sentiment. In the investment world, few market commentaries can be read without a mention of this theme in terms of managers’ stock selection.

But for the handful of funds actually named recovery, what exactly is a recovery stock now that consensus seems to agree recovery is under way? The funds have certainly enjoyed the perhaps unintentional consequence of their monikers at this time.

M&G recovery is currently one of the best-selling portfolios in the UK all companies sector, according to the group, while the fund size of other such portfolios has grown over the course of the past year.

Within the UK all companies sector, there are six recovery funds Schroders, M&G, Slater, River & Mercantile, Rathbones and Standard Life Investments. From largest to smallest, in assets the funds have: £4.7bn (M&G), £248m (Schroders), £76.5m (R&M), £68m (Rathbones), £44.8m (Slater and £30.1m (SLI).

The two oldest portfolios in the sector are M&G, launched in 1969, and Schroder recovery, on offer since 1970. Over the decade to February 25, returns from both funds are solid, with Schroders beating M&G in terms of overall gains, posting annualised 10 year returns of 10.34 per cent versus the latter’s 6.90 per cent.

However, in terms of consistency it is the M&G fund with the advantage. According to Financial Express data, the M&G fund has either been
first or second quartile in the UK all companies sector every year since 2000, whereas the Schroders fund has occasionally dipped down to third and fourth.

MFM Slater recovery, run by Mark Slater, has been in operation since 2003, R&M’s fund has been around since February 2008 while Rathbone recovery launched in July 2009 and SLI recovery reaches its first year anniversary on 6 March.

On the only really comparable timeframe, six months to February 25, the six recovery funds have posted returns of 15.8 per cent from MFM Slater, 11.2 from M&G, 7.9 from Rathbones, 5.4 from Standard Life Investments, 2.8 per cent in Schoder recovery and R&M’s fund made a 2.3 per cent gain.

According to M&G, the fund may be named recovery but it is not geared to economic recovery, just corporate ones. Investing only in companies
that manager Tom Dobell understands and trusts, he looks for firms that are out of fashion or unloved and avoids distressed situations. Dobell
may invest in any company which has financial or operational problems but will not touch those which have issues in both.

The mandate of Schroders recovery, managed by Kevin Murphy and Nick Kirrage since 2006, is to provide capital growth by selecting out of favour companies the managers believe have good longer-term prospects.

Pointing out the differences between recovery funds, Murphy noted at a conference in January that not one of his top 20 positions is the same
as those in M&G’s recovery fund. “They are two different vehicles,” he said.

There are obvious differences in what managers see as a recovery play and where they are looking for opportunities.

There are obvious differences in what managers see as a recovery play and where they are looking for opportunities. Rio Tinto may be one of SLI recovery manager David Cumming’s top 10 holdings but Dobell recently sold the stock in his fund

For instance, Rio Tinto may be one of SLI recovery manager David Cumming’s top 10 holdings but Dobell recently sold the stock in his fund.

At the moment, the variances between the funds’ analysis of recovery situations can be seen in their respective weightings. According to their latest factsheets, the biggest sector bet for Schroders and SLI is financials, with weightings of more than 25 per cent in each fund.

Not so at M&G, where Dobell favours oil and gas companies and has less than 10 per cent in financials. Slater has miners as his top sector position and financials are not even in the top 10 position while at Rathbones industrials are favoured.

The M&G fund prefers the large-cap end of the marketand at the moment it has 14 per cent in mid caps, 2.3 per cent in smaller companies and a further 19 per cent is in Aim or other listed stocks. The Rathbone fund aims for a broad spectrum of market-cap exposure with a third of its portfolio in large, mid and small.

At the moment, SLI recovery has few small-cap positions, under 10 per cent with more than 40 per cent in mid caps.

Cumming says while the case for UK equities is less clear cut following the re-rating of many cyclical companies, he feels that there are plenty of opportunities to be found, particularly at the larger end of the market.

All the funds are listed in the UK all companies sector but some look outside the region. Julian Chillingworth, manager of Rathbone recovery and CIO at the firm, says his portfolio takes full advantage of its ability to go up to 20 per cent outside the UK market, using this flexibility to examine European recovery situations. This gives the fund greater scope to look at sectors not well represented in the UK market, he says, citing pharmas and telecoms as two examples.

With regards to the management style on the portfolio, Chillingworth does not just look at bombed-out stocks but more at special situations, where the company is likely to be the beneficiary of a change. His value, contrarian approach is typical of a recovery portfolio.

Recovery funds may be benefiting from their name due to the recent circumstances of the market but the portfolios have proved to be adept at changing with investment conditions.

Still, as with anything in fund management, just because the name is the same does not mean there is commonality in style or performance. Now may be a good time for recovery-style portfolios but advisers need to look closely to see exactly what each manager believes constitutes recovery in today’s market.


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