M&G Recovery - another tough year

Dominic Rowles | Thu 29 August 2019

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• Many companies in the fund continue to be overlooked by other investors
• We're encouraged that the manager hasn’t changed his investment process
• We think the fund can be used to diversify a broader portfolio but recognise it's been a difficult fund to hold of late

Our view

Tom Dobell looks for companies that have gone through a tough patch – maybe they've been mismanaged or missed a profit target. He then buys shares in the ones he thinks have the potential to recover.

He's managed the M&G Recovery fund for almost two decades and has shown an ability to invest in companies capable of a turnaround. It can take time for companies to restore investors' confidence following a disappointment though so periods of underperformance should be expected. The manager's flexibility to invest in smaller companies and derivatives adds risk too.

We share our clients' disappointment and frustration that the fund's performance has been poor in recent years. However it does something different to its peers and could be a good way to diversify a broader investment portfolio. We're also encouraged that the manager hasn’t deviated from his longstanding investment approach. The fund remains on the Wealth 50 but we're closely monitoring progress and will keep investors informed if our view changes.

The four stages of recovery

Dobell thinks companies go through four stages of recovery – unloved, stabilising, recovering well and mature. Below we look at a company at each stage in the recovery process.

Stage 1 – Unloved

Outsourcing company Capita's share price fell sharply in recent years following a series of warnings that profits wouldn’t be as high as expected. The manager took the opportunity to buy shares at a lower price. He thinks CEO Jonathan Lewis' plans to simplify the business and invest in new systems and digital capability could help reverse the company's fortunes.

Stage 2 – Stabilising

Essentra makes small but essential components used across a number of industries from mining to personal care. Its share price has struggled in recent years because of a poor corporate strategy implemented by a previous CEO. But Paul Forman took over in 2017 and his plans to restructure the business and rebuild customer relationships are well underway. The company recently reported solid progress in its financial results.

Stage 3 – Recovering well

GW Pharmaceutical is a global leader in cannabis-based medicines and its shares have been held in the fund since 2002. It's been through a number of challenging periods over that time and may not have survived without Dobell's investment and support. Today the company sells a variety of products including a popular treatment for childhood epilepsy. It also has a deep pipeline of new drugs with excellent potential, in the manager's view.

Stage 4 – Mature

Dobell bought shares in cruise company Carnival in 2013 when the Costa Concordia disaster caused its share price to fall. The share price has risen strongly since then and the company's now in better financial shape. The manager therefore sold his shares and reinvested into another unloved company with potential to recover.

How's 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.

Dobell thinks there's plenty of value on offer for investors prepared to unearth the hidden gems though and it's only a matter of time before this is recognised by other investors.

The manager's long-term track record is respectable. The fund's grown 194.7%* since he took control in March 2000. The broader UK stock market's risen 157.3% in that time although past performance isn’t a guide to the future. All funds will rise and fall in value so you could get back less than you invest.

Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2019

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