That bloody-mindedness hasn’t been rewarded of late: M&G Recovery has returned 16.1% over the past three years, compared with an average of 36.3% from its IMA UK All Companies sector.
Several of his holdings – Tullow, Kenmare and Gulf Keystone for instance – are serial offenders. ‘Some of my critics would say these companies are repeat underperformers, and that list does look rather familiar,’ Dobell acknowledged.
Yet the size of his fund indicates that many are happy to wait with him for a turnaround, appreciating his longer-term record and clearly communicated approach.
Few other managers can count on such faith from investors; those who can, such as Citywire A-rated Neil Woodford through his recent dip in relative performance, typically share Dobell’s longevity and readily understood investment style.
Harry Morgan, head of private investment management at Thomas Miller Investment, cites two reasons for hanging onto underperforming managers. First, there should be a ‘clear and credible’ explanation for any struggles.
As an example, Morgan points to AAA-rated Julie Dean’s Schroder UK Opportunities fund. A star performer over pretty much every standard timeframe, it has slumped to the foot of the rankings on a three-month basis after being caught in the Budget-induced plunge of the insurance sector. It has lost 3.5% for that period while its average competitor is up 0.2%.
Morgan is not unduly troubled by that given that it has suffered from an identifiable and discrete one-off event. ‘If the reason is credible and there is scope for recovery, you would stick with it.’
Daniel Lockyer, fund of funds manager at Hawksmoor Investment Management, adds that he would quit Dean not because of such shocks but if her fund exhibited any prolonged underperformance, as that would imply she was reading the Cazenove business cycle incorrectly.
Morgan’s second argument in favour of patience relates to portfolio construction. He recalls holding funds like Jupiter Income and Invesco Perpetual Income during the dotcom boom, a time when such strategies were being ‘slaughtered’, as not only a hedge but one that generated income in the meantime.
Lockyer is of a similar opinion. ‘We do not want all the funds pointing in the same direction.’ He is one who has stayed with Dobell through his travails. In a small irony, Lockyer feels that if Dobell had modified his approach and so generated better returns in the interim, it would have been a sell signal.
‘In general my instinct is not to sell,’ Morgan concluded. ‘But that is not to say we will hold on to a dog forever.’ He notes that life becomes particularly difficult when clients start querying the rationale for clinging to dud.
So when is it time to walk away from a continued disappointer? Lockyer sells when a fund’s characteristics drift from those that formed the initial investment rationale.
He highlights Hugh Hendry and his Eclectica Absolute Macro as a recent example. ‘The main reason for holding it was that it would hang on in there in a rising market, but would come into its own in a falling market.’
That has ceased to be the case now, though, with Hendry declaring himself a bull late last year. ‘It was not behaving the way we wanted,’ remarked Lockyer. ‘If we hadn’t sold it in the summer, we would have sold it on the back of that.’
Lockyer has also recently exited + rated Stewart Cowley’s Old Mutual Global Strategic Bond fund, which has slipped below average on medium-term views despite still looking strong in the long term. With this fund, Lockyer sold not because Cowley had abandoned his process but because he disagreed with his fundamental predictions of a weak pound and high inflation. ‘If you do not believe in those views, that is a reason to sell.’
When it comes to those whose styles have been out of favour, Morgan counsels waiting to see whether the fund rebounds in the months when such approaches regain popularity. ‘If it is still not performing then, that is the point at which you need to have a serious conversation.’
And what about trading in and out funds rather than buying and holding through thick and thin returns? Morgan observes that doing so is easier than ever now that ‘front-end loads are a thing of the past’.
A-rated Richard Buxton makes no secret of only ever being first or fourth quartile – confident that he is more often in the former camp. ‘It is refreshingly honest,’ commented Morgan. Lockyer concurred: ‘It helps us as a buyer, but it probably does not help Old Mutual.’
Would Morgan move regularly in and out of such funds to try to capture the good times and avoid the leaner spells? He doubts it. ‘To balance that volatility, you might hold a passive fund,’ Morgan proposed instead.