M&G Recovery rewards patient investors

M&G Recovery, whose adverts featured in the Investors Chronicle as long ago as the 1960s, has been one of the best performing funds in the Investment Management Association's UK All-Companies sector over the past 10 years; indeed, since its present manager, Tom Dobell, took over the role in March 2000. In that period, it has outperformed the FTSE All-Share index by 61 per cent and its own sector by 62 per cent. This has earned Mr Dobell a nomination for Morningstar's UK Equity Fund Manager of the Year award.

Morningstar, a data provider on funds, says M&G Recovery's strong performance flows from consistently using a bottom-up approach to investing that seeks out companies that have fallen from favour, but have the potential to recover. Mr Dobell does not just buy a company's shares, he works with its managements to help turn the business around. And he can be that involved because he does not run any other funds. Besides, M&G's corporate finance team help him with restructuring; he is also helped by a deputy, David Williams, backed up by M&G's equities analysts and credit specialists.

Mr Dobell does not look to make short-term gains. He keeps his holdings until he feel that recovery is in the price, so it is not unusual for him to hold a stock for more than five years.

And, with some sort of economic recovery in the offing, now could be a good time to buy the fund's units. That's because there are still many companies in need of both a helping hand and patient shareholders. Indeed, over the past two years around 25 new holdings have been added to the fund, and 2009 threw up unprecedented opportunities. However, the fund contains companies at different stages in the recovery cycle, so it is never heavily weighted towards distressed businesses - and that helps to smooth investment returns.

M&G Recovery's total expense ratio (TER) is 1.66 per cent, which, according to Morningstar, is a touch lower than the median for its type of fund. True, TERs do not account for trading costs in a fund but, as M&G Recovery does not trade very often, these are unlikely to be eat into returns, as with more active funds. And the fund's initial and annual charges of 4 per cent and 1.5 per cent respectively are a fairly standard level for a retail open-ended fund, even though this one outperforms most of its peers.

Over 2009 M&G Recovery nearly doubled in size from £2.4bn to £4.7bn, due not just to recovery in stock markets but also cash inflows. That's a testament to its record but, if the fund continues to get larger, this could limit its ability to take meaningful positions in smaller stocks. That could be a problem because Mr Dobell has added most value with his smaller-cap investments, says Morningstar. However, Jackie Beard, an analyst at Morningstar, says size is not yet a constraint so the data provider maintains its highest rating for the fund.

Because it can take years to turn a company round the fund's performance is not always so good over the shorter term. That fact suggests that investing via regular fixed amounts, an investment plan called pound cost averaging, may be a good way to buy the units. The long-term nature of its investments also means the fund's units are only suitable for investors with a similar investing horizon - at least three to five years - and a high appetite for risk. For those who slot into that category, M&G Recovery units look worth buying.

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Key fund data:

Source: Investors Chronicle, M&G and Morningstar

Top ten holdings:

Source: M&G as of 31 December 2009

Geographical breakdown:

Source: M&G as of 31 December 2009