Dobell defends Quindell position following US ‘bear raid’M&G Recovery manager bemoans “tricky” April as fund slips behind peer group once again.
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Struggling M&G manager Tom Dobell has defended the weighting in Aim-listed outsourcing firm Quindell in his £7.2bn M&G Recovery after an “unpleasant anonymous bear raid” by a US firm halved its share price.
Quindell, which had become a stock market darling with its extraordinary growth in the past year, was hit heavily in recent weeks following a research note from US firm Gotham City Research. The research levelled a series of damaging accusations at Quindell that has spooked investors, halving its share price from 40p to roughly 20p.
Mr Dobell said that, while some of the accusations were “spurious”, others “had some legitimacy” - but the manager said he was an “enthusiastic supporter” of the firm and remained positive on its prospects.
He had originally built up a 1 per cent position in the fund in November 2013 but this had grown to be the third biggest overweight position in the fund at the end of March, at 2.3 per cent of the portfolio.
The collapse in the firm’s share price has contributed to what Mr Dobell termed a “tricky” April in which the fund has lost money.
Mr Dobell said the Recovery fund had experienced a “slightly better period” in the past year in terms of performance due to the market beginning to favour his investment style.
However, the fund is still in the bottom quartile for performance in the IMA UK All Companies sector in six months and one year, according to FE Analytics.
Market conditions are shifting in favour of M&G Recovery according to manager Tom Dobell, hailing six months of improving relative performance.
 However, the manager acknowledges that the picture has changed in the past month, with his fund slipping back thanks to stock-specific issues.
The manager’s 2.3 per cent holding in Quindell has lost over 50 per cent of its value following allegations of accounting malpractice it denies, but Dobell says he is sticking with the stock.
“April has been tricky for us,” he said. “We have given back some of the gains we have made. But it’s all in a day’s work and we are intent on giving our best to support these companies as they deal with their problems and then we will all have something worthwhile at the end.”
“It has been a slightly better period for us over the past 12 months, and the last six months in particular,” he added.
“Our approach remains unchanged but we are now about six years or so after the financial crisis there has been a lot of adjustment at the company level and it’s clear the difficult economic conditions are beginning to pass and things are beginning to improve.”
“We are beginning to see risk appetite for companies and stock picking investment to normalise.”
“We are not out of the woods yet, there are still a lot of problems and companies living with the aftermath of the crisis. But we would say things are beginning to normalise. That has helped us over the past six months.”
Data from FE Analytics shows that this improvement in the £7.2bn M&G Recovery’s performance was short-lived however, and was brought to an end this month.
On a relative basis the picture improved until the middle of last month when markets took a tumble on a return of risk-aversion.
Relative performance of fund to index over 1yr
Source: FE Analytics
Stock specific issues seem to have hurt the portfolio, with Dobell’s position in Prudential and Aviva under pressure following the budget.
The fund’s largest overweight Easyjet has suffered as a highly cyclical stock which had grown very fast prior to the market peak.
Dobell’s significant position in insurance outsourcer Quindell – 2.3 per cent of the fund – also hurt him. Dobell owns 8 per cent of the company.
Quindell has recently been embroiled in controversy following the publication of serious allegations about its accounting by a self-styled US research firm.
Quindell vehemently denies the allegations and is suing, but the stock has suffered nevertheless, causing woe for the company’s shareholders including investors in M&G Recovery.
Shares are down 54.89 per cent since the allegations, translating into a 1.33 per cent fall in the value of the fund on its own.
Performance of stock vs indices in 2014
Source: FE Analytics
Prior to the allegations the position, which Dobell initiated in September, had been the top contributor to the fund’s returns over a year.
“It is obviously going through some growing pains,” Dobell said. “The shares have been very volatile and up as far as 46p at one point [they are now at 23p] and recently have come back down on the back of a rather unpleasant and anonymous hedge fund type American bear raid and so-called research which had some spurious material but some of it had some legitimacy.”
“It’s in transition and we are working closely with the company and its advisers, we have had multiple meetings and so far they and responding very well.”
Dobell also gave a personal vote of confidence to chief executive Rob Terry, saying that he was a victim of this country’ poor attitude to entrepreneurs.
“We build them up to smash them down,” he said.
Many of Dobell’s problems have come from the off-benchmark part of the portfolio which makes up 21 per cent of the fund – and half the work and two thirds of the worry, as he puts it. Half of this bucket is in AIM stocks.
While the large and mid cap segments of the portfolio have generated positive relative performance over the past year the smaller companies segment has had a minor negative effect and the off-benchmark positions a very considerable negative effect.
M&G Recovery remains top quartile in the IMA UK All Companies sector over a decade but is in the bottom quartile over five and three year periods.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Data from FE Analytics shows that the fund outperformed the sector until the financial crisis of 2008 and then in the recovery year of 2009 but has struggled since.
In 2010 and 2011 it underperformed the sector before recording bottom quartile returns in 2012 and 2013.
Some commentators have suggested that the size of the problem has made it harder for the fund to outperform.
Larger funds find it harder to take meaningful positions in stocks at the smaller end of the marketcap spectrum.
However, M&G Recovery has 23.6 per cent in medium sized companies and 6.1 per cent in smaller companies.
It has to be said that the fund has very small overweights to the small and mid cap areas of the market of 2 and 8 per cent respectively.
Many of the off-benchmark holdings are in large companies which would be listed on the FTSE 100 or the upper end of the FTSE 250 by market cap.
Quindell, 2.3 per cent of the fund, was set for a FTSE 100 position before its recent setback, while First Quantum Minerals, which makes up 2.1 per cent of the fund, is of FTSE 100 size.
Irish-listed Kingspan Group would be at the upper end of the FTSE 250 by size.
As Dobell points out it has largely been positions in this off-benchmark bucket that have hurt the fund in recent years. Kingpsan, for example, is down 13 per cent since March 2013.
The fund has been beset with stock-specific issues for some time, and there is currently a question mark over the immediate future of BP, with is the largest foreign shareholder in Russia thanks to its 20 per cent in Rosneft.
Today it announced a 24 per cent drop in first quarter profits, but this was slightly better than expectations, leading the share price to react positively.
At 7 per cent it is the largest holding in the fund. BP announced a 2.6 per cent increase to its dividend and the prospect of share buybacks. |
