M&G Recovery still holds much long-term merit, even if we are less enamoured with it than we have been. The fund’s relative performance has disappointed investors in recent years: Since the start of its woes in Aug 2011 to the end of December 2014 it has trailed its Morningstar Category average and FTSE All-Share Index by 8.6 and 6.4 percentage points on average each year, respectively. Although that is an unsatisfactory outcome for investors, the fund has in fact remained ahead of both comparators since manager Tom Dobell took charge at the end of March 2000.
The fund’s assets, which ballooned from around £2.3 billion in 2009 to £8 billion in 2012, could arguably explain some of its muted returns in recent years, but we have not seen enough evidence to suggest this is the case: The fund’s average market cap has remained fairly steady and Dobell’s contrarian approach mitigates some of the liquidity constraints of running a large fund.
Having said that, the fund’s continued outflows, which have been nearing all-time highs in recent months, cause a degree of concern.
This concern is compounded by the hefty stakes held in a large number of companies in the portfolio, some of which are highly illiquid. This combination could inhibit the manager’s ability to drive the fund as successfully as he has in the past. As of the end September 2014, around 37% of the portfolio by assets was tied up in companies where the fund owns between 5% and 20% of the equity.
Dobell’s presence at the helm here mitigates some of our concerns in managing the potential risks to the portfolio’s composition, particularly should outflows continue amidst challenged market conditions. He is a seasoned and capable manager and continues to be supported by the wider resources at M&G, including the equity analysts, credit teams, and corporate finance team.
We acknowledge that he has remained true to the process that has been successful in the past, and we believe that the fund still has merit. However, a Bronze rating provides a better reflection of our current conviction here.