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When and why do you dump the laggard funds?

by Robert St George on May 21, 2014 at 11:13

When and why do you dump the laggard funds?

Tom Dobell, manager of the £7 billion M&G Recovery fund, admits that he can be ‘bloody awkward’ in sticking with businesses that disappoint. ‘We back people through thick and thin,’ he affirmed.

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.

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  • Tom Dobell
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  • Julie Dean
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  • Stewart Cowley
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  • Richard Buxton
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