Two years ago Guardian Money highlighted the miserable investment performance at one of the UK’s most popular funds among small investors, M&G Recovery. The manager, Tom Dobell, asked for patience, telling investors he “profoundly and emphatically” believed his portfolio of shares represented good long-term value, and that “we will stick this out until we have to”. But two years on, the £4.5bn fund is in even worse shape. Should its remaining investors finally jump ship?
This week fund advisers Tilney Bestinvest released their annual guide to underperforming “dog” funds, or what they call “the guide fund managers would love to ban”. Who did it name as the biggest dog in the UK equities world? M&G Recovery.
“It was one of the top performers in its sector just a few years ago, but its descent from pedigree to mutt was swift. We removed it from our top-rated funds in 2013, when its decline seemed irreversible, and other investors now seem to have lost faith as well. The fund has shrunk from a Great Dane-sized £8bn at its peak to a more Labrador-like £4.5bn now.”
Over the past year it is ranked 269th out of 270 funds in its sector. Over three years it is rock-bottom, ranked 264th out of 264. Investors have seen a gain of only 11.3% since 2012, compared to 47% for the average fund, and 80%-100% at the best funds, such as Standard Life’s “unconstrained” fund.
Why has the Recovery fund fared so badly? One clue is its biggest single investment, BP. This week the oil giant reported a $6.3bn loss, sending its share price down to 391p, compared with the 600p it was on before the Deepwater Horizon disaster in 2010. In 2013, Dobell told Guardian Money: “We are not very good quitters; we are long-term investors. Having taken its medicine, we feel BP has an outstanding, almost impregnable, position.” Unfortunately, the market has not shared Dobell’s confidence, and shares in BP have continued to track sideways.
Morningstar, an investment data firm popular among small investors, issued a downgrade to M&G Recovery earlier this year, moving it from “gold” to “bronze”. Fund advisers Chelsea Financial Services took a similar decision a year earlier.
“We took the fund off our buy list around 18 months ago,” says Darius McDermott of Chelsea. “It was a hard decision, as the fund had been an exceptional investment for our clients for a very long time. However, it became a victim of its own success, became too large and performance started to come off in 2010. Since then, unfortunately, things have gone from bad to worse … Tom’s stock picks in oil, gas and mining have also continued to hurt. It’s a long way from returning to a ‘buy’ recommendation.”
M&G is asking investors for more patience – and reckons the fund might be turning the corner. Graham Mason, head of investment at M&G, says: “We’re disappointed to be included in the [dog funds] report, but M&G’s funds are managed for long-term performance and we ask clients to take a similarly long-term view when investing.
“The fund continues to be managed in line with its original investment proposition: buying unloved companies and working with management to improve the underlying business. More recently the fund has had a stronger six months as a result of stock selection in healthcare and industrials in particular. The investment environment is shifting, company fundamentals are back in focus and we see a more buoyant M&A market. This plays wells to the stocks held in the fund.
“Over the six months to 30 June 2015 the fund is second quartile and rose 5.3% compared with a rise of 3% in the FTSE All Share Index and the 6% average gain in the sector.”
Despite calling the fund a “mutt”, Jason Hollands, author of the Tilney Bestinvest report, actually has a modicum of sympathy for M&G. “The continued presence of M&G Recovery, a fund once feted by advisers, is a disappointment – though the sun is finally breaking through the clouds, with the six and three-month performance numbers both ahead of the FSTE All Share Index.
“This type of approach, focusing on unloved companies, can test investors’ patience, though disappointingly for a fund that’s half invested in small and mid-caps, these are parts of the market that have both had a stellar run overall during the last three years, and rival recovery and special situations type funds have all had blistering runs of outperformance.”
So where should investors who want to ditch M&G Recovery go instead? Hollands lists his “pedigree picks” for UK equities as Standard Life UK Equity Unconstrained, Unicorn UK Income and JO Hambro UK Dynamic. The Standard Life fund has become hugely popular among advisers over the past few years following amazing performance: if you invested £10,000 three years ago it would be worth around £21,000 today. Its biggest investment is housebuilder Crest Nicholson, whose shares have jumped from 300p a year ago to 550p in recent trading.
