Hargreaves finally ousts M&G Recovery from Wealth 50

Hargreaves Lansdown’s decision to dump the M&G Recovery fund from the Wealth 50 has been described as a long time coming.

Tom Dobell’s £2bn fund has underperformed the wider UK stock market since early 2012 and failed to meet Hargreaves Lansdown’s expectations even during the short periods when unloved, value companies have returned to favour, said investment analyst Dominic Rowles.

M&G Recovery was first added to the Wealth 50, then known as the Wealth 150, in October 2007. Rowles said it outperformed the broader UK stock market by 8.5% for its first five years on the list.

“We’ve started to doubt Tom Dobell’s ability to outperform,” he said.

“Since September 2019, value-style companies have been back in vogue. This boosted the performance of other funds with a similar approach but we’re disappointed that the M&G Recovery fund once again appears to be missing out.”

Hargreaves concerned by early-stage companies in M&G fund

The update on the Hargreaves Lansdown website also raised concerns about the fund’s exposure to early-stage companies.

The bulk of the fund (27.1%) is in mid-cap companies, followed by 21% in giant large-cap firms, Morningstar data shows. 18.2% is in small-cap while 16.8% is in micro-cap companies.

Dobell (pictured) has argued low valuations and future potential justify their positions in the portfolio, Rowles noted.

“The danger is that these smaller investments take up too much of the manager’s time and the rest of the portfolio suffers. They’re also more difficult to buy and sell (less liquid) than their larger counterparts.”

Woodford Equity Income, another Wealth 50 constituent, was suspended in June due to the illiquid nature of its holdings that meant it could not keep up with redemptions.

‘They’ve been a long time getting to that decision’

Chelsea Financial Services managing director Darius McDermott was surprised it has taken Hargreaves Lansdown so long to drop the fund.

“They’ve been a long time getting to that decision when many others were out a long time,” McDermott said. The fund’s assets under management peaked at £6.5bn in February 2012, falling £4.5bn since that period, according to Morningstar data.

Chelsea Financial Services removed the fund from portfolios in March 2014.

M&G Recovery fund performance

Source: FE Fundinfo

Hargreaves Lansdown had published a note on the fund as recently as August admitting performance had been “poor in recent years” and that its place in the Wealth 50 was being monitored.

Rowles had been more upbeat in a fund research note from December 2018 that described Dobell as one of Hargreaves Lansdown’s favourite managers for being able to keep his nerve when investing in parts of the market hated by others.

Despite poor performance, he said he was encouraged Dobell hadn’t deviated from his investment approach. “We think it’s got the potential to do well over the long term, although there are no guarantees,” the December 2018 note said.

An M&G spokesperson acknowledged recent disappointing performance but pointed to annualised returns of 13.3% since launch over 50 years ago. “The fund has a distinct, value approach buying unloved companies and working with management to improve the underlying business, a style that has been out of favour with UK equity markets of late,” they said.