Mark Dampier: Keeping things simple pays off for investors with M&G
Friday 16 November 2012
Within the financial industry there seem to be constant calls for simple products that investors can understand. I am always intrigued by this. Unit trust funds, which have been around for decades, are relatively simple. Although the underlying investment process is hard to follow for some funds, there are also plenty of long-term, straightforward strategies. One example is M&G Recovery.
The fund was launched in 1969 and has been managed by only three individuals since, all of whom have maintained the same philosophy. The current fund manager, Tom Dobell, has been at the helm for 12 years, and sees no reason to change what has been a successful strategy: simply put, M&G Recovery looks to buy unloved businesses that have experienced setbacks, but with patience can be nursed back to health. Such companies, due to their chequered past, often have exceptionally low valuations, meaning any improvement in their situation can mean a large rise in share price.
However, a turnaround is never guaranteed. Inevitably, some businesses that get into difficulty go bust. Through his process of getting to know company management and working out whom he can trust to deliver, Mr Dobell aims to minimise these cases. In his portfolio of some 100 holdings, he says it averages one a year. When it happens it is always disappointing, but it is all part of investing in this area of the market. What he aims to do is ensure a good spread of assets, and that his winners more than make up for the losers.
Adopting this approach is clearly a game of patience, something many investors today are lacking. Yet time and time again I find the best fund managers are those who take a long-term view and where turnover on the fund is very low. Mr Dobell looks at a five-year timeframe, though he has had many companies in for much longer than this. He also looks to be a constructive and supportive shareholder, but not one that will unduly interfere with the business.
The long-term nature of the fund can be seen in the variety of companies that make up the portfolio: around a third is in stocks such as Tullow Oil and Aggreko that have already recovered and are delivering good results for investors. The remainder of the fund is invested in companies that are at an earlier stage of the process. Examples include the Irish building materials supplier Kingspan, and HomeServe, a company that sells emergency repair services to households. In both cases the firms have been beset with problems in their domestic businesses, but Mr Dobell sees great potential in the expansion of their overseas operations.
Another feature of the fund is exposure to less well-explored parts of the market. Several stocks listed on the Alternative Investment Market (Aim), the junior market of the London Stock Exchange, are included, notably in energy and natural resources. Listing requirements are less stringent on Aim, so some investors treat stocks listed here with suspicion. However, Mr Dobell points out some companies choose Aim because it is less expensive. Some of these firms are large enough to be in the FTSE 250 and he believes there are outstanding opportunities.
Over the long-term, fund performance has been outstanding. Since 2000, when Mr Dobell took charge, the fund has risen by 121 per cent, vs 38 per cent for the UK sector.
However, more recently the fund has struggled, lagging its peers in 2011 and so far this year. This can be attributed to the outperformance of defensive, blue-chip stocks which have become fashionable with investors due to the stability of their earnings. The fund holds none of these – they are not recovery stocks. Also, the fund has no bank shares, which have also done well in 2012. This might surprise you as they would seem prime candidates for recovery. But Mr Dobell doesn't sufficiently trust management and argues their future is not in their own hands.
It is refreshing to reconsider this fund's enduring, simple approach. It has stood the test of time, and I believe it will continue to do so. A further attraction is the possibility for merger and takeover activity among the fund's holdings.
Companies have been generally loath to spend cash given the current uncertain economic climate, but at some stage this is likely to change as they start to recognise the value in their competitors.
Undervalued, unappreciated companies tend to make natural targets, so this fund would be a natural beneficiary of any upturn in activity.
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 www.hl.co.uk/independent
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