Tom Dobell has admitted the last year has proved ‘especially challenging’ as his £1.4bn M&G Recovery fund was hit by further steep losses, extending a prolonged downturn in performance that has left him languishing at the bottom of his sector over the last decade.
Cyclical energy and financial stocks heaped more pain on the portfolio amid the coronavirus crisis, with the fund’s 19.2% loss over the last 12 months nearly double the average 10.2% fall for funds in the Investment Association’s UK All Companies sector. The benchmark FTSE All Share-index was down 15.4% over the same period.
After a strong 10-year run at the turn of the century, Dobell’s fund has languished at the bottom of the sector in the last decade, returning just 7.3% over 10 years, a fraction of the 81.1% delivered by the average peer, and the 66% return from the index.
|IA UK All Companies||-17.9%||-10.8%||-6.4%||15.1%||81.1%|
|FTSE UK All Share||-19.9%||-15.4%||-9.5%||16.3%||66%|
‘Despite having to weather an extended period of underperformance, we have stuck to our recovery proposition and been sorely tested for doing so,’ said Dobell, in the fund’s annual report, covering the year to the end of June.
He said the the pandemic had hit the potential recovery situations he invests in, ‘particularly hard’ and investors continued to prefer ‘more solid, predictable stocks’.
Although the fund experienced ‘brief bouts’ of outperformance, Dobell said exposure to cyclical areas of the economy such as ‘energy, industrial, and financials’, which came under ‘extreme stress’ in the pandemic, dented returns. Dobell’s aversion to high valuations also saw him screen out consumer goods companies, which have performed well during the Covid-19 crisis.
The energy sector was a particular burden on the fund, slumping as the oil price collapsed and leaving Tullow Oil (TLW) and BP (BP) as the two worst performing stocks in the portfolio over the past year.
Dobell said Tullow has had a number of problems ‘including poor-quality oil discoveries off the coast of Guyana, a reduction in production guidance, the removal of its chief executive, and suspension of the dividend’.
Dobell (pictured) said HSBC, which has a large exposure to emerging markets, was constrained by lockdown and then by ‘low interest rates and cancelled dividends, as well as rising tensions over China’s plans to curtail Hong Kong’s autonomy’.
Another ‘source of disappointment’ has been software and IT group Micro Focus (MCRO) as it struggled to absorb the purchase of HP Enterprise software.
‘We used the opportunity presented by share price weakness to add to the fund’s holding as fundamentally this is a sound business encountering short-term difficulties,’ said Dobell.
The manager highlighted the performance of the fund’s biotechnology stocks, however, as having adding ‘significant value’, pointing to Mesoblast (MSB.AX) and Oxford Biomedica (OXB).
Mesoblast shares have more than doubled over the past year after one of its regenerative treatments was trialled in the US as a potential lifeline to patients with Covid-19. Oxford Biomedica, which is working with Oxford University on a potential coronavirus vaccine, is up by more than 100% from March lows.
Biotech stock GW Pharmaceuticals (GWPH.O) has lagged the market but Dobell said it the company was ‘making good progress in gaining approval for its transformative cannabinoid drug treatments’, one of which has already been approved for sale in the US, Europe, and the UK.
Dobell made eight new purchases and 14 sales in the year to the end of July, while four stocks were taken over.
The fund also now holds positions in ‘mispriced’ Compass (CPG), the world’s largest catering company, Primark owner Associated British Foods (ABF), pub chain JD Wetherspoon (JDW), and UK defence contractor Babcock (BAB).
The main sales in the fund were Carnival (CCL), the cruise ship operator which had been ‘reduced to a rump holding’ as it suffered during Covid-19 while home maintenance business Homeserve (HSV) was ditched after it ‘completed its recovery cycle’.
‘While many companies face major challenges in the short run, we are confident that many of our holdings are robust and show encouraging evidence of sound management,’ said Dobell.
‘By giving companies the breathing space they need to execute a strategy for recovery, we can see a very material creation of value as the market re-rates those companies. We believe the potential of our portfolio remains considerable.’