Dobell looks for road to recovery

M&G manager Tom Dobell asks investors to continue being patient as his Recovery fund falters but he remains the epitome of the long-term investor and is not for turning

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The last three years have been tough for Tom Dobell of M&G. His giant Recovery fund has faltered, slipping into fourth quartile over three years. This time last year he was asking investors for patience. One year on, the fund has come in 285th place out of 296 funds in the IMA All Companies sector. Has Dobell lost his touch? Should the 75,000-plus army of small investors start moving on?

But Dobell is not for turning. Yes, he urged patience a year ago. And he does the same today. He remains the epitome of the long-term investor who barely looks at quarterly company results and despairs at the short-termism that afflicts the stockmarket and many other fund managers.

On the day we speak, one of his long-term holdings has come up trumps. Dobell is the biggest single shareholder in engineering group Invensys, owning 9 per cent of its stock, and it has received a £3.4bn bid from French rival Schneider Electric. Ten years ago, the group was in crisis, with mounting debts and losses. But over the past year Invensys’s share price has nearly doubled, with first Siemens buying its rail signalling business and then the Schneider bid.

EasyJet has been another big success. Dobell owns 5 per cent of the company, and at times has been the arbitrator in the bitter battles between the firm’s combative founder Stelios Haji-Ioannou, who still has 37 per cent of the stock, and the board of the company.

Haji-Ioannou felt easyJet was splashing out too much on planes and not enough in dividends for shareholders – and Dobell was sympathetic: “Stelios is very capable and astute, but has found it hard to let go … I had a number of meetings with [easyJet chief executive] Carolyn McCall in which we made it clear we felt Stelios was justified. It took about six months, but we saw how she dealt with easyJet’s liability issues, operating performance and cash flow. She scaled down the rate of fleet growth and paid a special dividend. EasyJet was making a 10p per seat profit, now it is making £5 a seat in profit.”

EasyJet’s shares have taken off since Dobell bought into the airline in 2010, leaping from about 450p to 1,250p this week, and he reckons they remain a good stock to hold.

But success with Invensys and Easyjet has failed to offset what Dobell calls “a number of self-inflicted stock selection setbacks” elsewhere. His biggest headache is the £450m of BP shares, the fund’s biggest holding, which have gone nowhere for years.

The 2010 Deepwater Horizon oil spill in the Gulf of Mexico has cost BP an astonishing £27.7bn – a bill that keeps rising. BP shares have traded at 400p-450p for the past two years, still markedly below the 640p before the disaster struck. “It has been a troublesome investment due to the brutal US ‘justice’ system, where the company has been abused by politicians, lawyers, the press and the competition,” Dobell says.

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Dobell says the market has been unkind to the sorts of companies he holds. During the prolonged economic crisis investors have wanted companies with certainty and security, rather than those which have fallen on hard times but are likely to recover.

“During a long period of sluggish growth, the sort of companies I invest in have been even less desirable than normal,” he admits. Mergers and acquisitions, which have traditionally favoured recovering companies, have also been largely absent in the past few years, although he believes that will change for the better soon.

He “profoundly and emphatically” believes his stocks represent good long-term value. “A number of factors have contributed to making this a pretty challenging time, although I am not asking people to be sympathetic. We have a clear and understood set of investment principles, which I agree are going through a tough time. Since I have managed the fund we have had 11 years of good performance and two-and-a-half years of underperformance. We have been going through a period of extreme adjustment, both in the market and in the economy. So after 44 years do we throw out the strategy and become momentum-led? No. We will stick this out until we have to.”

Some are not prepared to wait. Jupiter’s fund-of-funds team dumped its holding in Recovery earlier this year, concerned about Dobell’s big weighting to oil and gas companies. But it remains on Hargreaves’ Wealth 150 list of recommended funds and head of research Mark Dampier reckons it is time to buy.

“A year or two of underperformance is nothing. I bought some of this fund a few months ago, and am thinking about topping up again. If you are going to be a really good manager you have to do something different. Dobell’s record is very good over the long term and he will come round again. It is more logical to buy when things underperform and are out of favour. You do not want to buy when it is number one.”

M&G Recovery can expect to be scrutinised heavily in the next few months as advisers watch to see if Dobell’s stock selection comes through in the same way the UK economy appears to be recovering. And nobody will be more satisfied than Dobell himself. Recently he had a very public spat with the board of Gulf Keystone, angered by the chief executive’s £23m pay package over the previous two years, despite missing targets and making losses.

What of his own bonus? After two years of disappointing returns surely he won’t be receiving one? “I have been paid a bonus, but it was based on prior performance and has a lot of deferred elements. My bonus will be pretty thin to non-existent if performance does not come through.”

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Patrick Collinson is the Guardian ’s personal finance editor