Since my appointment as manager of the M&G Recovery Fund in 2000, I have applied the same investme...
Since my appointment as manager of the M&G Recovery Fund in 2000, I have applied the same investment approach that has driven the fund throughout its 38-year history: buying shares of unloved companies that have the potential to restore themselves to health over the long run. The fund has maintained an excellent long-term performance through all market conditions, owing to the consistent application of this clearly defined investment approach.
The fact that I am only M&G Recovery Fund's third fund manager bears testimony to the consistency of its investment strategy. The fund takes a long-term investment horizon because this is the time frame required for a company to solve its problems and for its shareholders to reap the rewards. Investing in troubled companies that are restoring themselves to health requires patience and a long-term view - this ensures that investors enjoy the full benefit of a corporate recovery without being held hostage to short-term swings in market sentiment.
The fund's investment approach entails building a thorough understanding of a company's circumstances, taking meaningful stakes and establishing a constructive, two-way dialogue with management teams. This latter point is a fundamental part of the fund's investment philosophy, and one that we believe maximises wealth creation for our investors.
By regularly meeting chairmen, chief executives and finance directors, we can monitor progress, discuss strategic issues and ensure that our clients' interests are heard in the boardroom. This discussion will encompass key issues such as management changes, corporate strategy and fund raising. In a recovery situation, where we are often major shareholders, this communication can be critical to a company's success. We are active investors, not activists - our aim is to help companies along the road to recovery, not to stir up trouble.
Shares in the companies we invest in are held for long periods, typically three to five years, resulting in low levels of portfolio turnover. More complex situations may take even longer and, particularly in the early stages of corporate recovery, there is the need to be prepared for a certain amount of volatility from individual holdings. We act as responsible, long-term shareholders, not short-term traders of shares.
The fund's investment strategy also imposes a natural discipline to sell shares when the corporate recovery is well under way, allowing the proceeds of past performance to be reinvested in new ideas, which hopefully will provide the source of future returns.
Hunting is a good example of a holding where I took an active role in a company's turnaround. The oil-services firm was a position that I inherited when I took over the fund seven years ago. Historically, Hunting had been managed like a family-owned business, with little consideration for shareholders. It was unfocused and directionless, and profitability was poor.
Soon after taking over the fund, I visited the company and discussed with its chairman how its business could be improved. Hunting's share price at the time was 80p. Not long after our discussion, Hunting took the strategic decision to focus on oil services and sell its defence operations. Following the appointment of Dennis Proctor as chief executive in 2001, the business underwent a restructuring process, including the renegotiation of contracts by management and moves to improve profitability.
Hunting's transformation was well timed as it coincided with a period of increased investment in the oil industry, which boosted demand for its services. As a result, Hunting's profits doubled for the second consecutive year in 2006 and its share price soared, reaching a peak of 842.5p in July 2007. With its recovery process well underway, I have reduced my holding in the company.
M&G Recovery Fund has a history of strong delivery since its launch in 1969, due to the fund's consistent investment approach. It follows a simple strategy of buying shares in companies when they are low, holding them for the long term and selling when the company's recovery has been fully realised in the share price.
As a result, the fund has achieved an annual average return of more than 16% over the past 38 years, well above the FTSE All-Share Index, which achieved an annual return of around 12%. It is also one of only six funds in its sector to have beaten the FTSE All-Share Index for each of the past seven calendar years.
An ability to implement a consistent long-term investment strategy, which has historically delivered outstanding results, makes M&G Recovery Fund an ideal core holding for clients seeking exposure to the UK equity market.
