Mr Dobell’s fund has continued to underperform in the past year, in spite of his ‘recovery’ style of investing coming back into fashion.
The manager has been defending his fund’s underperformance in the period since the eurozone crisis on the basis that it has been a tough time to buy stocks in a recovery style as investors flocked to high-quality defensive names during the uncertainty.
But the fund has delivered bottom-quartile performance in the IMA UK All Companies sector in the past year, according to FE Analytics, in spite of an environment in which recovery stocks and recovery-focused funds have outperformed.
In the year to April 28, the fund delivered a return of 7.9 per cent, less than the 9.4 per cent rise in the FTSE All-Share index and the average return of 13.6 per cent by the funds in its sector.
But the performance differential was even starker when compared to the other recovery-style funds in the IMA UK All Companies sector, which have all delivered top-quartile performance in the past year.
However, the figures have been affected by a poor April for the M&G fund, in which it was particularly affected by the collapsing share price of Quindell, which was a 2.3 per cent holding in the fund. In the year to the end of March, the fund had been beating its benchmark.
Charles Stanley Direct’s head of investment research, Ben Yearsley, defended Mr Dobell and said he had bought into the fund recently as he backed Mr Dobell to start to outperform.
He said in the past 12 months the fund had “basically tracked the FTSE All-Share index”, which was “not a great return” but much improved from the “dreadful” performance between May 2012 and May 2013. The poor performance in that period led Mr Dobell to apologise to investors in April 2013 for the fund’s “lacklustre returns”.
But Paul Surguy, head of managed funds at Sanlam Private Investments, said the recent pick-up in mergers and acquisitions activity, a key driver of the M&G fund’s returns in the past, should boost the fund.
Ben Willis, head of research at Whitechurch Securities, said investors “may want to give him a further stay of execution, maybe another 12 months”, but added that performance needed to significantly improve because “there are better alternatives out there at present”.
A spokesperson for M&G said: “Tom Dobell’s investment approach is to back the underdog, with little regard to the economic situation of the region within which the company does business.
“Performance at the very short end has been a challenge, but we are long-term investors at M&G – Tom typically backs companies within his fund for about four to five years, and we do ask clients to take a long-term view of performance also.
“Periods of mild disappointment are not unusual in recovery investing, and Tom is doing his utmost to turn performance around. Many companies the fund supports are making significant progress towards corporate recovery... the team believes the value within these businesses will be realised through materially higher share prices.”
What is a recovery approach?
A manager with a recovery approach invests in companies that have been through a period of difficulty that has led to share price underperformance that the manager thinks can be recovered.
The recovery may take the form of a change in the company’s management or its business approach, or it may result from a change in the firm’s market or environment.
Recovery stocks were shunned during the eurozone crisis as investors fled to more defensive multinational stocks and yield-paying ‘bond proxies’, while crucial merger and acquisition activity dried up, but the market rally has allowed it to flourish again.
The style is inherently risky because managers are investing in companies going through troubled times that they may not overcome.
There are seven funds with ‘recovery’ in their title in the IMA UK All Companies sector, but they do not all take the same approach.
Tom Dobell takes a hands-on approach with the M&G Recovery fund, taking large stakes in beaten-up stocks and getting involved with the running of the company and the board make-up.
However, the likes of the Schroder Recovery fund, managed by star value managers Nick Kirrage and Kevin Murphy, and the R&M UK Equity Long Term Recovery fund, managed by Hugh Sargeant, concentrate on spotting opportunities using quantitative screening tools.
