M&G goes off the boil

Adviser suggests pulling out of these funds, writes Nic Cicutti
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Every year, the unit and investment trust industry vacuums up billions of pounds of savers' money. But in many cases, fund managers deliver poor investment returns year after year. Experts are agreed on what should happen next. After a decent interval, in which you give your fund manager a chance to redress any problems, you dump your investment in that company.

This, it is being argued, is what should be happening with many funds from M&G, one of the most highly respected fund managers in the industry.

BESt Investment, a City-based firm of analysts, issued a report recommending that investors pull out of nine funds, which include M&G's flagship Recovery fund, its Dividend, Managed Income, High Income, Extra Yield, European & General, Equity Income and Midland & General funds, each of which have between pounds 1.4bn and pounds 300m invested in them.

BESt Investment's argument is that after years of good performance in the 1980s and early 1990s, M&G has gone off the boil. One reason, the analysts argue, is that many of the fund managers who were so successful have left.

More fundamentally, the report argues: "Across the board [M&G] has favoured traditional income stocks, mid-cap stocks and `value' stocks. However, since the mid-90s, a fundamental shift in the economy has not favoured these areas."

The overwhelming majority of gains in UK stock markets in the past two years has been concentrated within the upper reaches of the FTSE 100 share index.

BESt Investment says that although there have been changes in senior personnel, there seems little sign of any changes in investment emphasis. Even if performance were to improve, the report adds, it might take up to three years to turn the ship round.

Of course, cynics might argue, if all this switching took place BESt Investment would be on to a nice little earner. Yet the company's chairman, John Spiers, says: "For a couple of years, we have advised savers with a heavy concentration of money in M&G funds that this might be the best thing for them to do. Those who have listened to us have done extremely well out of it.

"We rarely come out with a strong view like this. But in the past 12 months M&G's results have been appalling. The fact is that they have become middle of the road in PEPs. It is not good enough to be with someone because they had a grand reputation."

Vivian Bazalgette, managing director at M&G Investment Management, agrees the long-term bias of his company has tended in favour of smaller and so-called mid-cap companies. This is based on the belief that the right stock selection in that area should lead to significant outperformance of more mature and larger firms in the FTSE 100.

"What we have seen in the past year or two has been unprecedented under- performance," he says. "But it looks as if this reached its apex in July this year."

Smaller capitalised companies are trading at a 20 per cent discount to the heavily inflated price/ earnings ratio of the main market.

"After the experience of the last 10 days, the markets are looking to invest in good value again and small caps are doing very well," Mr Bazalgette says. As a result, Midland & General has grown 4 per cent in value in the past week. Recovery, a giant with more than pounds 1.4bn invested in it, has picked up 2 per cent in the past month.

He adds that at a time when M&G's long-term strategy is being validated by events, it would be lunacy to pull out now.

Albeit with reservations, other leading financial advisers also argue that now is not the time for a complete pull-out of M&G funds.

Amanda Davidson, a partner at Holden Meehan, a London firm of IFAs, argues: "We are not recommending that people invest in M&G other than for their pensions or corporate bonds. We also know that the investment strategy has not been a good one recently, but we are suggesting that investors give them another year before making a final decision."

Tim Cockerill, investment director at Whitechurch Securities, in Bristol, says: "What we are suggesting is that if you have a large chunk of your portfolio invested in M&G, you should pull out of it. But if it were a question of pounds 3,000 out of pounds 20,000 in the Recovery Fund, for instance, it makes sense to keep your money in there."

A defiant Mr Spiers says: "If the argument is in favour of a mid-cap strategy, which I do not necessarily disagree with at present, there are plenty more successful funds operating in that sector, including Fidelity, Invesco, Credit Suisse and Gartmore. Our advice is still to consider pulling out."

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