Fund Manager Interview - M&G Recovery

In this article James Davies, poses some questions to Tom Dobell, manager of the M&G Recovery Fund, where Mr. Dobell explains how he manages the UK’s oldest open ended fund.
 
The M&G Recovery, which invests mainly in UK equities to achieve its objective of long term capital growth, has delivered some impressive figures recently.  Over the years many of our investors have selected the fund to gain exposure to the UK stock market through an actively managed portfolio. They have been prepared to accept the higher investment risk associated with an equity fund and, whilst not a guide to future performance, it has pretty consistently outperformed the benchmark of the FTSE all-share over recent years.  The fund is available through Chartwell Direct at 0% initial charge and is one of our Top 100 funds.  You can invest by downloading an application form by clicking here or logging into your Cofunds account online.  Alternatively, if you have any queries please do not hesitate to contact our Investment Helpdesk on 0117 9170777

Many commentators are saying that the UK faces more serious economic challenges than other G7 countries. If this is true, why should investors bother holding UK equities?

I share people’s concerns about the state of the UK economy but that does not in any way dampen my enthusiasm for individual investment opportunities. UK companies are increasingly international – about two-thirds of FTSE 100 companies’ earnings come from overseas – and I prefer to invest in companies which are geographically diversified so the fund’s holdings are not tied to the fortunes of the UK economy. More importantly, the M&G Recovery Fund focuses on corporate recovery, not economic recovery. As a result, we prefer to support companies which are in some kind of trouble, but are able to influence their own fate without necessarily relying on a favourable economic climate. We believe that understanding the long-term prospects of individual companies is the best way to increase the wealth of our investors.

What makes you include a stock within your fund?

I seek out companies that are unloved, neglected or misunderstood by the market but have the potential to recover. My focus is therefore on buying undervalued stocks where I see special potential in the company that should lead to a turnaround in its fortunes and greater appreciation by the market. Recovery candidates must be underpinned by competent management and a sound corporate strategy. We will never invest without having first met the people who run the business at a senior level.

During the last year what changes did you make within the fund?

The philosophy behind the M&G Recovery Fund has remained unchanged through the fund’s 40-year history. Recovery candidates come in all shapes and sizes, but many of our new purchases over the past year have been at the smaller end of the market cap range. The addition of new stocks such as Inchcape, Pace and BTG has meant that for the first time in many years, the fund is overweight in mid caps relative to the FTSE All-Share Index. Looking ahead, we expect this trend towards mid caps and small caps – the natural hunting ground for recovery stocks – to continue. More opportunities will arise as more companies struggle to meet their financing requirements and we are well placed to take advantage of that scenario.

Can you give an example of a stock you are currently holding within the fund and why?

I have recently invested in Inchcape, a car retailer based in London which operates in both developed and emerging countries. The business is primarily involved in the sale of new and used cars, parts, servicing, finance and insurance, and it distributes some of the world’s leading car brands including Toyota and BMW.

Demand in all car markets collapsed in the global recession and Inchcape’s share price tumbled 90% from its peak in 2007. However, we believe the company is more resilient than the market gives it credit for: a restructuring plan is under way, sales are geographically diversified and 50% of profits are derived from predictable aftersale services and parts. Furthermore, the balance sheet is in good shape following a successful rights issue which we supported, and the management team have positioned the company well so that any improvement in car sales is likely to result in a dramatic improvement in Inchcape’s fortunes.

-Tom Dobell, manager of the M&G Recovery Fund

The views expressed by the fund manager were obtained by Chartwell on 18 September 2009 and are not necessarily the views of Chartwell Group Limited.