The M&G Recovery Fund has been through something of a baptism of fire in recent years. We have previously documented the reasons behind the fund's period of disappointing performance, although we recently met Tom Dobell for an update. He believes the fund is emerging from its time in the darkness.
According to Tom Dobell, financial markets have been through several years of substantial distortion, partly a result of quantitative easing. Over this time, many investors have favoured companies with certainty of earnings delivery, or 'quality' stocks. These are the types of company the manager naturally avoids, while the recovery stocks he tends to favour have been shunned by the market. Throughout this time he has continued to buy what many other investors have been discarding - as such, he feels the hidden value within the portfolio is now huge.
2014 was a particularly tough year for the fund, but Tom Dobell believes the headwinds have since abated. Merger and acquisition activity has been lacking in recent years, which has historically been beneficial for the fund, but he feels this has picked up over the past six months. Indeed, there have been takeover bids for three of the fund’s holdings over the past year; Advanced Computer Software, Synergy Health, and Pace, each of which subsequently saw their share prices bounce.
The team have also recently been active in finding new opportunities in the market. They recently initiated a position in CRH, a building materials and distribution company, which appointed new management in early 2014. The management team have since been selling low-return assets and are working on restructuring the business. They have also announced the acquisition of assets being sold by Holcim and Lafarge - two cement companies undergoing a merger.
Tom Dobell takes a truly active interest in the companies in which he invests, nursing them through difficult periods to return them to good health. GW Pharmaceutical is a good example of an early-stage business that the manager has worked closely with for many years. After several years, his work was finally vindicated, and the stock has performed exceptionally well since the start of 2013. The manager also has the flexibility to purchase higher-risk smaller companies should he see fit.
Our view on this fund
In our recent meeting, Tom Dobell was suitably contrite, but also positive about the recovery potential of his fund. The manager has not strayed away from his central strategy, even during tough times, and he maintains his belief that the recovery process is not broken - a view we share. It is clear he remains determined to turn things around, although of course there are no guarantees.
We feel there is great potential waiting to be unlocked within the fund, which over the longer-term could reward patient investors. However, it is worth remembering that periods of underperformance should be expected when it comes to recovery-style investing, as this type of company can remain out of favour for prolonged periods of time. It will not always be a smooth ride with this fund; however, it maintains its place on the Wealth 150+ list of our favourite funds across the major sectors.
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