M&G American Fund research update

On 28 April 2015 the M&G American Fund will undergo a number of changes. They are being made in an effort to improve the fund's performance which has been lacklustre in recent years. The changes include:

New fund manager

From 28 April 2015 John Weavers will take over from Aled Smith as fund manager. John Weavers joined M&G in 2007 as part of the equities team. In January 2012 he joined the team responsible for running M&G's equity income funds and is currently deputy manager of the M&G Dividend Fund. The funds currently managed by the team include:

Source: M&G fund factsheets as at 28 February 2015

New investment objective

Presently, the fund's objective is to grow the value of investors' capital over the longer term. When John Weavers takes over he will aim to generate attractive long-term returns from a combination of dividends and capital growth.

This is the same approach currently used on M&G's equity income funds. The team believes focusing on dividends instils discipline in company management. If they commit to paying sustainable and rising dividends they are less likely to fritter cash generated by the business on uneconomic growth or unnecessary acquisitions.

They suggest a disciplined approach to reinvesting cash to grow the business and paying a rising dividend over the long term should ultimately result in a rising share price. Importantly, they place an emphasis on dividend growth, meaning they will target companies with low yields and the potential to grow dividends over the long term, as well as those offering a high yield now.

New name

The fund's name will change to the M&G North American Dividend Fund to better reflect the new investment objective.

Charges taken from capital

Presently, the fund's charges are deducted from income. From 28 April 2015 charges will be taken from capital. This will increase the amount of income that can be distributed to investors, but it will also decrease the fund's capital growth potential.

Dividend payment frequency

The fund will move from paying dividends annually to paying quarterly. M&G believes this is more fitting to the fund's new investment objective, while it is also consistent with North American companies' quarterly dividend payment practice. It is anticipated that the fund will pay its last annual dividend on 31 October 2015 with quarterly payments commencing in January 2016, with subsequent payments at the end of April, July and October.

Our view on this fund

Aled Smith has managed the M&G American Fund since December 2004. While performance was good in the run up to the financial crisis he has struggled to outperform since 2008 and over his tenure as a whole the fund has lagged behind the S&P 500 Index:

Past performance is not a guide to future returns. Source: Lipper IM, figures to 01/04/2015.

The past five years have been particularly tough and while the fund has grown by 67.6% over this period the S&P 500 Index has risen 100.4%. The extent of the underperformance can be seen in the chart below which shows the fund's performance during Aled Smith's tenure relative to the S&P 500 Index. When the line is rising the fund is performing better than the index and vice versa. The period since the end of 2010 has been particularly painful in relative terms:

Our analysis suggests poor stock selection has contributed to lacklustre performance in recent years and while on balance we view Aled Smith's approach of seeking companies undergoing positive change and improving returns on capital as sensible, we are pleased to see M&G taking action to hopefully improve performance on this fund.

However, while John Weavers will have the support of an experienced team he does not have a track record as lead manager of his own fund. In addition, while the team has exposure to some US companies through the M&G Global Dividend Fund we would like to monitor how their process fares over the longer term when applied to a dedicated US fund. We would stress this should not be taken as a signal to make any changes to a portfolio, providing it continues to meet its objectives, but we are not considering the fund for the Wealth 150 list of our favourite funds across the major sectors at the current time.