Mark Dampier: Investors lose faith but M&G is playing the field
Friday 04 October 2013
Ironically, the M&G Recovery Fund seems to be hoping for recovery itself. In the past few weeks I have been struck by the number of people asking me if it is a "sell". My answer is a resounding "no".
It must be galling for Tom Dobell, the fund's manager, to hear stories like this. He assumed responsibility for the fund on 31 March 2000 and guided it through the fallout first from the dot-com bubble and the global financial crisis. Two years of weaker performance since then have led many investors to question his calibre or suggest the fund has grown too big.
Of course he fights his corner on both counts, and so he should. An active manager paying little attention to the composition of the benchmark index will experience periods of underperformance from time to time. Unfortunately, patience is often in short supply nowadays and this could prove to be a costly mistake for many investors.
I caught up with Mr Dobell last week for the first time in around a year. He reiterated that while he was not trying to pick out the next takeover candidate, M&A activity had historically been beneficial for the fund. Over the past few years, though, there has been little activity in this area, which has not helped performance. This probably has much to do with the financial crisis, as companies had a fit of jitters and weren't keen to grow. Indeed, the focus was at the other end of the scale – on cutting costs, rather than spending money on acquisitions and expansion.
Personally, I believe this might be changing. If M&A activity does pick up, it could provide a shot in the arm for the fund given the number of companies in Mr Dobell's portfolio that he believes are undervalued. He says there are many candidates that would ordinarily have been taken over by now, but have been hampered by the economic environment. I would stress again on his behalf, though, that Mr Dobell does not pick stocks on the basis that they might be subject to M&A activity. Rather, he invests in vulnerable companies that for a number of reasons, he believes, have been mispriced. He suggests financial ratios are generally looking low at companies of this type and they are as cheap as they have been in the past five years.
The fund's present position sees it with 50 per cent invested in companies listed on the FTSE 100. This is an investment decision based on where Mr Dobell sees the best value, not one made on the basis of liquidity. A further 20 per cent of the fund is held in other UK-listed companies, of which around half are quoted on AIM.
At the sector level, around 19 per cent of the fund is invested in 12 oil and gas companies, among them some larger firms. This includes an overweight position in Tullow Oil, which itself has had a difficult period. Indus Gas is a an AIM-listed company of which the fund owns 7.5 per cent. Indus has significant quantities of gas reserves that it hopes to turn into liquefied natural gas (LNG) for export. A new holding is Lamprell, an engineer in the energy sector where a new management team has come in after four profit warnings.
Elsewhere, Mr Dobell remains cautious on financial companies, holding 19 per cent in the sector. He admits being six months too slow in realising the recovery potential of Lloyds Banking Group, where he initiated a position at around 50p after it had already risen from its lows. Holdings in Prudential and the Lloyd's of London insurance market have been OK. A purchase of Aviva has also been made as a new chief executive came in.
Overall, I remain a fan of the fund. Under Mr Dobell, it has risen 152 per cent compared with 73 per cent for the FTSE All Share index and 69 per cent for the average fund in the IMA UK All Companies sector.
Such strong performance probably carries little weight with momentum investors who jump out at the first sign of underperformance. Mr Dobell quite rightly won't change his process, though. He is one of the most dedicated fund managers I know and I will look to top up my holding over the next few weeks on any further weakness.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent
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