Lockyer, co-manager of the PFS Hawksmoor Distribution fund, tends to avoid multi-billion pound portfolios in favour of those with more flexibility, but says that the £7bn M&G Recovery fund is a notable exception.
He highlights the importance of building diversified portfolios with funds that perform well in different market conditions, and as a result is backing more than one deep value manager in his higher risk portfolios.
Referring to M&G’s large cap bias, Lockyer said: “There is certainly some good value in large caps. It doesn’t matter how big BP is – if it does turn around, it’s going to make a huge difference to performance.” “Ordinarily we like smaller funds that can go down the market cap spectrum, but given the style of the manager and his experience, we prefer to back him and use the L&G UK Alpha fund.”
“It has a very similar style [to M&G Recovery] but Richard Penny, who is an ex colleague of Dobell (pictured), is more flexible, which has enabled it to do very well of late. It is much more volatile though.”
“We own M&G Recovery across all of our risk-rated portfolios, but in those that are higher-risk and more growth orientated we also hold L&G UK Alpha, as the two really complement eachother.”
Both the M&G and L&G funds target out-of-favour companies that the manager believes are set for a reverse in fortune. Changes in company management, structural reform in a particular sector and diminishing competition are often seen as catalysts for improved performance.
L&G UK Alpha is currently £220m in size. Its top 10 holdings are full of small and micro-cap companies, with the biggest positions including AIM-listed technology companies InternetQ and Optimal Payments.
By contrast, M&G Recovery is very much large-cap in its focus. Top-10 positions include BP, Prudential, Shell and Lloyds. Interestingly, both managers do have a major stake in Prudential, which was recently hit by pension reforms outlined in the Budget.
Dobell’s portfolio has endured a difficult time of late. Dobell was one of the most consistent performers in the IMA UK All Companies sector for the 10 years following his appointment in March 2000.
FE data shows his fund returned just under 100 per cent over the period, compared to 19.87 per cent from the sector average and 29.71 per cent from the All Share.
Performance of fund, sector and index March 2000 – March 2010
Source: FE Analytics
However, in recent years Dobell has struggled, underperforming his benchmark in the calendar years of 2011, 2012 and 2013. Over a two year period M&G Recovery has returned 22.56 per cent – just over half as much as both his sector and benchmark.
L&G UK Alpha has prospered over this period, with returns of 58.12 per cent.
Performance of funds, sector and index over 2yrs
Source: FE Analytics
Poor stockpicking in the industrial sector has been one of the biggest detractors from performance.
Lockyer says that there will be a time that Penny underperforms, especially if small caps give back some of the stellar gains they’ve made in recent years, and is equally confident that M&G Recovery will eventually come good.
“We’re sticking with Dobell,” he said. “He has a portfolio now that has a lot of value in it and we are very positive.”
“A lot of his holdings have decent cash levels for the price that he’s paying for, and the onset of M&A – which seems to be picking up – will also help.”
“We feel that selling now after a few years of underperformance is the last thing you should do. His style hasn’t changed, it’s more than the broader market is currently favouring other areas.”
A 50/50 blend between the two funds would have significantly outperformed the FTSE All Share over a seven year period, which many experts equate to a full market cycle, with less volatility than the UK Alpha fund.
Performance of portfolio, funds and index over 7yrs
Source: FE Analytics
While L&G UK Alpha has eased the pain of M&G Recovery’s underperformance in recent years, a holder of both funds were greatly helped by Dobell’s emphasis on downside protection in the 2008 financial crisis – a year that Penny lost more than 37 per cent. Over the same 12 month period, Dobell lost 27.53 per cent, outperforming the FTSE All Share.
Investors would have been better holding onto L&G UK Alpha over the seven year period, but Lockyer says that the importance of not putting all of your eggs in one basket – and not to mention the lower volatility and max drawdown – had made this lost gains well worth it.
