M&G Rhodes apologises for mistakes in 2014

For the first time since the fund’s launch in 2008, the fund underperformed the MSCI All Country World Trade GBP index, posting 2.34 per cent returns compared to 10.64 for the benchmark.

Mr Rhodes, who took on the M&G fund at launch, just four years after joining M&G, blamed the oil price, selling quality stocks too soon and his US position for the poor performance. He said: “Open admission of failure in this industry is rare” and blamed his “complacency” for bad decisions, claiming he had learned important lessons during the “difficult year”.

But the fund’s performance appears to have done little to affect confidence in Mr Rhodes. Analysts warned against judging the highly successful manager too soon, pointing to his stellar track record since taking on the fund five years ago.

“I’m impressed with the honesty,” says Andy Parsons, head of investment research & advisory services at the Share Centre. “While it was disappointing performance, he still had a positive return last year. He didn’t lose investors money and if you look over the longevity, the fund has performed well over time.”

M&G Global Dividend has consistently been one of the best performers in the Investment Association's (IA) Global fund sector and Mr Rhodes’ strategy of targeting total returns and company growth instead of a pure dividend focus has delivered in previous years. In 2009, 2010 and 2011 the fund beat its benchmark and delivered double digit returns, posting a return of 28.02 in 2009 and 23.34 return in 2013, when it was also Europe’s best-selling equity fund.

“An 18-month period of poor performance can happen to anyone,” said Hargreaves Lansdown senior analyst Laith Khalaf. “The issues were a combination of sector, geographical and stock selection, and across all of those he’s not been alone. The oil price is really something that has affected managers across a lot of different portfolios.”

Mr Rhodes claimed the oil price shock accounted for five per cent of his underperformance last year. The manager said some share price reactions had been “very painful but justified and deserved” while others were “irrational and causing some genuine mispricing”. He acknowledged that “there may have been some complacency around the number of companies where oil plays a role regardless of the actual economic affect.”

For example exiting Fugro (0LNT), a Dutch company hit hard by the oil drop, cost the fund 51 basis points over the year while Prosafe (0J5Y) and SeaDrill (0HYK) were also impacted heavily. SeaDrill was down 69.90 per cent on one year on 20 January while Prosafe was down 53.71 per cent on the same year and Mr Rhodes said he was looking to sell both.

However Mr Rhodes was bullish about several other companies which had been badly affected. Gibson Energy (GEI:TOR), down 11.72 per cent over one year is the largest holding in the fund’s portfolio and has suffered as a result of the oil price despite limited direct exposure. The manager believes shares in Gibson, along with methanol supplier Methanex (MX: TOR) and refiner Holly Frontier (HFC:NYQ), are mispriced and has been adding to those holdings.

Mr Rhodes said it had been a “mistake” to go underweight in the US, and that the failure to invest in Apple had cost the fund a 0.50 per cent hit on performance.

The final issue in Mr Rhodes's analysis was poor timing in divesting a cluster of equity holdings including Chubb (CB:NYQ), Reynolds American (RAI:NYQ) and Compass (CPG), all of which continued to perform well.

But despite the mistakes and performance dip, analysts said they should not prompt a mass sell-off of the fund and praised both Mr Rhodes's ability to learn from his mistakes and decision to stick with his strategy.

“The worst thing that can happen after something like this is a portfolio manager changing his style or process to meet last year’s events,” said senior portfolio manager at Seven Investment Management Peter Sleep. “You’ve got to be consistent and take the rough with the smooth. The one thing that Stuart has always focused on is that he’s not chased that yield. He looks at where he can grow a sustainable dividend over time which means you’re looking at management and how the business is structured.”

Mr Rhodes said there would be no change to the underlying process used at the fund, and no change to the types of companies sought by the fund.

Fund performance vs sector and benchmark (annual total return %)

Source: Trustnet. *As at 20 January 2015.

Source: M&G Global Dividend, Stuart Rhodes' letter to investors.