M&G Recovery - does something a little different

Dominic Rowles | Mon 31 December 2018

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• Lots of Tom Dobell’s chosen companies are being overlooked by others
• He hasn’t changed his longstanding investment process
• We think his fund’s a great way to diversify a portfolio

Our view

It’s a tried-and-tested way to make money in the stock market. Look for companies that have gone through a tough patch – maybe they’ve been mismanaged, or missed a profit target. Then buy shares in the ones you think have the potential to recover. If you’re right, the share price could rise as other investors become more positive.

It sounds simple. But few investors can hold their nerve when investing in parts of the market hated by others. We think it takes an experienced investor to do it well. And Tom Dobell is one of our favourites.

He’s managed the M&G Recovery Fund for almost two decades and has a good long-term track record. But unloved companies can remain out-of-favour for a long time, so periods of underperformance are to be expected. His investments in smaller companies add risk too.

We share our clients’ frustration that recent performance has been poor. But we’re encouraged that the manager has never deviated from his established investment approach, even during the tough times. We think it’s got the potential to do well over the long term, although there are no guarantees. It’s still on the Wealth 150 list of our favourite funds.

What's changed in the portfolio?

Recent investments include outsourcing company Capita. Its share price fell sharply at the start of 2018 when it announced profits wouldn’t be as high as expected. Tom Dobell took the opportunity to buy shares at a lower price. He thinks new CEO Jonathan Lewis is doing a good job of simplifying the business and is encouraged following a recent meeting with him.

He bought shares in broadcaster ITV too. The company’s struggled in recent years because of falling advertising revenue and competition from online media platforms like Netflix. The manager still sees potential though. He thinks ITV could increase the amount of content it produces. The company also benefits from the experienced hand of CEO Carolyn McCall – the person who successfully turned around EasyJet.

The manager recently sold his shares in pharmaceutical outsourcing company UDG Healthcare. The company’s share price had risen strongly and its recovery was complete. The money was reinvested into other companies nearer the start of their recovery.

How has the fund performed?

Aside from some short periods of strong performance, like in 2016, companies going through short term issues have been overlooked by other investors in recent years. They’ve preferred to invest in high-quality companies with track records of growing earnings year after year. The manager doesn’t invest in this type of company and this held back performance.

Tom Dobell thinks there’s plenty of value on offer for investors prepared to unearth hidden gems and it’s only a matter of time before this is recognised by others. He expects the number of mergers and acquisitions to pick up once the uncertainty of Brexit is behind us. This could boost the fund’s performance, although there are no guarantees.

Tom Dobell’s long-term track record remains impressive. £10,000 invested when he took control of the fund in March 2000 would be worth *£28,653. The broader UK stock market would’ve returned £23,197, although past performance isn’t a guide to the future. Like all funds, it can fall as well as rise in value so investors could make a loss.

Past performance is not a guide to the future. Source: Lipper IM* to 30/11/2018

Find out more about the fund including charges

M&G Recovery Key Investor Information