The investment analyst (pictured) will continue holding the fund for its diversification benefits, but says he is keeping an eye on its progress. "Personally I’m going to hold on to him because he’s doing something very different to other people in the UK market, but it’s a less comfortable hold than it has been in the past," said Morgan.
"He’s got quite a few stocks at the moment that will be difficult for him to get out of in one go, without there being some corporate action, through M&A [mergers and acquisitions]."
"This has never bothered him in the past but M&A has been very, very low."
"The fund getting bigger will make it more difficult for him to exit these companies, but to be fair this has been his style anyway."
"However, M&A is quite a big thing to rely on. This was very buoyant up until the crash, which helped the fund with its performance."
According to FE data, the £7.5bn M&G Recovery fund has returned 13.58 per cent over three years, putting it in the bottom quartile of its IMA UK All Companies sector.
Over the same period, the sector has returned 24.86 per cent, and the fund’s FTSE All Share benchmark has returned 23.74 per cent.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
The recent slump in performance means the fund is only beating its sector and benchmark by a single percentage point over five years, though Dobell’s 10-year record is still very strong.
Among Dobell’s biggest off-benchmark positions are First Quantum Minerals, which has a 2.1 per cent weighting, and FTSE 250 companies Kenmare Resources and Invensys, which have a 1.71 and 2.1 per cent weighting, respectively.
"If Dobell were to sell out of some of his smaller compositions, he’d move the share price significantly," said Morgan.
"It’s almost like a venture capital style of investing, in that he buys a company for its potential, but has to wait for corporate action to come through."
Charles Stanley Direct continues to include M&G Recovery on its foundation fund list.
Although Morgan has expressed concern over the fund’s recent underperformance, he says now could be a good time to buy it.
"It could be a reasonably good time to look at it, because his style has been out of favour."
"Dobell is very passionate about how much value there is in his portfolio. I know that a lot of managers say that, but he’s a stand-up guy and it sounds like he’s right."
Dobell (pictured) was recently quoted as saying that the fund’s overweights in oil and gas and basic materials, and underweight in financials, were the biggest reasons for underperformance. However, he pointed to a possible uptick in M&A as something that could significantly boost performance.
Morgan says he rates the Schroder Recovery fund as a possible alternative, but points out it is very different in its approach.
"I like the duo of Nick Kirrage and Kevin Murphy – they’ve done a great job," he said. "They’re a bit different because they buy companies that are seriously challenged."
"Dobell does this as well, but you might see more defaults in the Schroders fund."
Murphy confirmed that only three companies have gone bust since they started running the fund back in July 2006.
Schroder Recovery has a far superior record to M&G Recovery since this date, but the vast majority of outperformance has come in the last year or so.
Performance of funds vs sector and index since July 2006
Source: FE Analytics
Although Morgan believes that the size of M&G Recovery has exacerbated the issue of M&A, he says he is relatively comfortable with AUM in general.
Murphy (pictured) says the size of the £350m Schroder Recovery fund is a big talking point within the team, though did not reveal the point at which the team will soft-close it. "When looking at recovery stocks, inevitably you need to look at smaller companies," he said. "It’s difficult to take advantage of these if you are very, very large."
"I can’t tell you the soft-close target, but suffice to say that we have in our mind a very firm view of when the strategy will become compromised."
"The fund could be twice the size that it is now, but not 20 times as big," he added.
Murphy accepts that there are a lot of recovery funds in the UK market, but does not think there are any that have the same style as his.
"I’m not aware of any funds that run money in the same way as we do," he said.
Hargreaves Lansdown’s Adrian Lowcock says investors would be wise to stick with Dobell, though he pinpoints the lack of M&A activity as a headwind for M&G Recovery.
"You do have to be patient with his style," he said. "M&A is a big part of recovery styles, and it’s been very quiet recently. There’s no way of telling when it will pick up, and it could underperform until it does."
"He works with management teams to try and get things done, but the levels have been unprecedentedly low."