M&G Recovery: February 2021 fund update

Dominic Rowles | Tue 16 February 2021

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• Michael Stiasny recently took control of the fund after predecessor Tom Dobell stepped down
• The long-established investment process will remain largely the same, with some small tweaks
• The fund’s performance has struggled in recent years as its investment approach has been out of favour
• The fund does not currently feature on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The M&G Recovery fund invests in UK companies that have fallen upon hard times, but where there is scope for a transformation in fortunes. This contrarian approach could bring diversification to the UK section of a broader investment portfolio. It could sit well alongside a UK equity fund that focuses on companies expected to grow earnings at a more consistent pace.

Manager

Tom Dobell, the fund’s prior longstanding manager, stepped down at the end of 2020. He was succeeded by deputy manager Michael Stiasny.

Stiasny has more than two decades of investment industry experience, having joined Prudential (which later acquired M&G) in 1998. He started his career on the Smaller Companies team, where he worked alongside Dobell, and quickly worked his way up to become a fund manager. In 2011, he moved across to the Recovery team, where he re-joined Dobell as deputy manager of the M&G Recovery fund.

The manager’s long association with the fund means he has good knowledge of the companies it invests in. He manages several other funds alongside this one, but they all share a similar investment process. He also has the support of the broader UK Equity team, including deputy manager Elina Symon. Overall though, we feel there are lots of talented fund managers in the UK All Companies sector and we currently have greater conviction in others to deliver strong performance over the long run.

Process

The investment process remains largely unchanged following Dobell’s departure. Stiasny continues to invest in companies unloved by other investors. Maybe they failed to meet investor expectations, or their managers made some unpopular decisions. Whatever the reason, to be considered for the portfolio, Stiasny must believe the company is capable of a recovery.

The investment process starts with a screen of the UK stock market, which aims to identify the market’s cheapest companies on a variety of valuation measures. Then the team carries out in-depth analysis on each company, paying particular attention to the company’s cashflows, people and recovery strategy.

That results in a portfolio of 60-80 companies that fall into four recovery buckets: unloved, stabilising, recovering well and mature. As companies make it into the ‘mature’ bucket, the manager gradually begins to take profits, reinvesting them into other unloved opportunities.

Stiasny recently sought to bring more structure to the investment process by introducing a formal quarterly meeting to review which bucket each company sits in, and assess any changes since the previous meeting. He also intends to be more active in taking profits and cutting losses.

The manager has the flexibility to invest in companies of any size, including higher-risk smaller ones. Following recent analysis of the portfolio, he found the team’s added value through their investments in medium-sized companies, so he expects this portion of the portfolio to increase in future.

Stiasny thinks the coronavirus pandemic created an opportunity to buy shares in strong, well-managed companies at attractive prices. Recent investments include contract caterer Compass, whose share price fell sharply as the lockdowns reduced demand for its services. But the manager thinks many of the firm’s smaller competitors could struggle to survive in the current conditions, allowing it to acquire cheap assets and increase its share of the market. He also expects demand for its services to rebound as life starts returning to normal.

Culture

M&G demerged from the wider Prudential business in October 2019 in order to allow both firms more flexibility. We typically treat corporate changes with caution, but the changes appear to have bedded in well and investment teams have had time to adapt.

Investing with Environmental, Social and Governance (ESG) principles in mind has become a priority for M&G in recent years. Each fund manager is encouraged to think about ESG in a way that’s appropriate to their fund. Stiasny has a quarterly meeting with ESG specialists from M&G’s Corporate Finance and Stewardship team to review the portfolio’s main ESG issues and identify any actions that need to be taken, such as engagement with the company’s senior managers. That said, the manager will still invest in businesses that aren’t traditionally seen as ESG leaders.

Cost

This fund is available at an annual ongoing charge of 0.57%, which includes a saving HL has negotiated for clients of 0.26%. The usual ongoing charge is 0.83%. This discount is achieved through a Loyalty Bonus, which is tax free in an ISA or SIPP, but may be subject to tax if held in another account. Investors will have to pay an HL platform charge of up to a maximum of 0.45% per year on top of this.

Performance

Aside from some short periods of strong performance, like in 2016, the fund’s recovery-focused investment approach has been out of favour in recent years. Investors generally preferred to invest in companies that can grow earnings more consistently, otherwise known as 'growth' stocks, rather than those that are unloved today but could potentially deliver handsome returns in the future.

Even accounting for the fund’s investment approach though, the fund hasn’t performed as well as we’d expect, given the type of companies it invests in. This suggests the managers’ stock selection held back returns. Remember all funds will rise and fall in value, so you could get back less than you invest.

The fund also underperformed the broader UK stock market over the past year. Performance received a boost towards the end of the period as the fund’s investment style returned to favour, but it wasn’t enough to offset losses incurred earlier in the year.

One of the fund’s weakest performers was outsourcing business Capita. Its share price fell sharply after it was announced that CEO Jonathan Lewis' plans to simplify the business and invest in new systems and digital capability would cost more than originally thought. It wasn’t all bad news though. An investment in Oxford Biomedica rose strongly as it played a key part in the manufacturing process of the AstraZeneca Covid-19 vaccine.

Past performance is not a guide to the future. Source: Lipper IM to 31/01/2021.

More about this Fund, including charges

M&G Recovery Key Investor Information