M&G’s Tom Dobell has said his £3.7bn Recovery fund is displaying a “curious correlation” with gilt yields as he grapples with the portfolio’s continued underperformance.
The manager’s fund has underperformed its peer group for several years and, after a better start to 2016, has resumed this struggle in recent months. On a 12-month view the portfolio has lost 5.9 per cent, compared with a positive return of 5 per cent for the FTSE All-Share.
M&G Recovery’s recent decline has also corresponded with a fresh drop in 10-year UK government bond yields, which have hit record lows since the country’s decision to leave the EU on June 23 - a choice Mr Dobell said he personally backed.
The manager suggested he was puzzled by the synchronised fall, but acknowledged it had become evident over the past two years.
“We have a curious correlation – not a particularly flattering one – to bond yields. We have noticed as yields continue to fall in the gilt market, the Recovery fund’s relative performance seems to remain under pressure. At times where yields start to rise the reverse is the case.
“The correlation is relevant. I don’t like it, but, it is there,” he said.
Mr Dobell said risk aversion in the market – which took hold in the build up to the June 23 referendum – has frustrated his attempt to the return the value strategy to outperformance.
This reticence has meant most investors continue to shun companies whose earnings are subject to an element of uncertainty, almost irrespective of such firms’ valuations, the manager added.
He said: “We were ahead at one point in early June which was encouraging after a lean few years.
“There were signs in the early part of the year that [negative sentiment] was beginning to abate which was really helpful for us, but there is still significant risk aversion out there so our performance has not been what we were looking for,” the manager explained.
“We’re not happy with the current performance, but we’re working really hard and have got a lot of stuff going on. I bought a lot of shares in the fund myself on the Friday after Brexit, so we’re confident on what we’re doing,” Mr Dobell added.
Year-to-date, the fund has returned 3.5 per cent, but this is still down on the 8 per cent seen in the FTSE All-Share.
It is exposure to large caps that has hampered the fund recently, according to the manager. M&G Recovery remains underweight this section of the market, but a 48 per cent holding in larger stocks still caused a 2.7 per cent drag on performance over the last 12 months.
One notable underperformer was Easyjet, but the manager said he remained committed to the firm. He said the more the stock fell, the more tempting it was to add to the fund’s 3.6 million shares.
Mr Dobell said turnover had increased in his 84-stock portfolio in the last-year, with some more sales expected to come as he attempts to reduce his number of holdings to around 75.
He has made six sales during this period, including generator supplier Aggreko and materials company Kingspan.
“Some of these companies, I absolutely love them dearly, and one or two I don’t. Kingspan and Aggreko are incredibly fine companies. Kingspan, I could kiss that chief executive, he’s just so good. But it’s out of our remit now as it is not a recovery situation.”
Mr Dobell said his team was studying UK housebuilders, a sector which has seen significant share price falls since June 23 on the belief that the outlook for the property sector has been soured by the vote to leave the EU.
He said: “They have very much been re-rated but I am pretty cautious. [That said] we have noticed they have given back masses of value and we’re on the case.”
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