Recovery investing at M&G focuses on companies that are out of favour with the stockmarket. The core tenet of the investment philosophy – unchanged since 1969 – is to search out companies that might be experiencing difficulties, but whose problems can be solved.
When other investors are ignoring the potential value that could be generated from the long-term recovery of these companies, the M&G Recovery investment team look to invest with the sole aim of achieving capital growth for their investors.
Tom Dobell, manager of the M&G Recovery Fund, David Williams, manager of the M&G Global Recovery Fund and deputy manager of the M&G Recovery Fund, Michael Stiasny, deputy manager of both funds, and analyst Elina Koknevica discuss their team’s approach to investing, with Gregor Morris, recovery investment specialist.
Gregor: How do you identify recovery opportunities?
Tom: There are plenty of opportunities regardless of how the market and the economy are performing. Companies follow their own lifecycle and we are looking for those businesses which other investors are valuing much more cheaply than we think they are worth.
We have to endure a period of time while a company sorts itself out and begins to show signs of recovery. However, the risk that we take at the start of the process can be repaid many times over as the company – and its share price – recovers over time. It’s a straightforward process and has been our approach to recovery investing for almost 50 years.
Michael: It’s about finding those ‘underdogs’ with special potential. Companies which have fallen on hard times, but we can see that with a little bit of help, have the right management and the right strategy to get back on their feet.
Gregor: How do you avoid genuine ‘value traps’ that are impossible to help?
Tom: Given that we are investing when the company is struggling and the share price is reflecting a poor outcome, it can require patience. However, we are not blind to the fact that ‘value traps’ exist. We need to be convinced that the companies we are investing in are executing and delivering on a business plan. Our experience shows that if a management team can implement strategy and has the cashflow, then our investment should be rewarded in the long run.
David: Over time, we’ve become more self-critical, more demanding and less willing to accept poor behaviour from company management. We’re more fussy about what we invest in. We are keener to measure the discernible progress on corporate governance where, for example, part of the journey to recovery is that the company gets its board in order and makes changes. We’ve definitely become more assertive in forcing those changes or withdrawing altogether if the changes are not fulfilled within a reasonable timeframe.
Michael: We back people for the long term if they deliver on what they say they’re going to deliver. With our experience, we know very quickly if something isn’t as it should be. There’s always a risk that a company is a ‘hopeless case’ that can’t – or won’t – be helped. In the first six months, which is very early in the recovery process, we can push for changes or we can cut our losses and sell the shares. We prefer to do the former if we can, rather than just abandon something we think has potential but where something or someone is preventing its realisation.
Gregor: How much emphasis do you put on engaging with companies?
Tom: Engagement is critical to our investment approach. We want to build long-term relationships and be supportive shareholders. We believe that the long-term success of companies is facilitated by effective investor stewardship and high standards of corporate governance. We try to influence a company’s actions in a positive way to the benefit of all shareholders and prefer to act honourably behind the scenes, not in the media.
We are prepared to back management teams through thick and thin, if necessary. Our investment time horizon is typically around five years, but we will also remain invested for considerably longer where appropriate. I believe this is genuine investing, providing support and investment to companies for the long term, enabling them to develop and grow.
Gregor: The Alternative Investment Market (AIM) is an important starting point for many holdings. What do you look for with AIM stocks?
Elina: I believe AIM is a great place, with a good choice of smaller and medium-sized businesses. It does, however, have a poor reputation for corporate governance and investors’ risk appetite can be fickle and change quickly. That can make AIM companies more receptive to help from committed longer term shareholders like us.
We are looking for two things with AIM – special companies and mispriced risk. A combination of both creates terrific opportunities. If you find the right company on AIM and buy shares at an attractive entry price, you have a great opportunity to grow with that company as they execute on their strategy. By often being the largest shareholder at the early stage of a company’s development, we can have a significant influence on shaping its recovery. Our ultimate goal is to take a company from AIM on to the main stockmarket. We believe very few investors share this approach.
Gregor: How do you work together as a team?
Michael: Recovery investing can be a trying and difficult process, regardless of whether things are going well or not. It can also be lonely at times, as you’re often investing against the consensus. Having a group of like-minded people is important, not only in terms of making each individual a bit more robust, but also to foster discussion and debate.
David: What one person may see as a risk, another will see as an opportunity. I think many investors would run a mile from many of our investments, but our collective mindset, coupled with each team member’s expertise in slightly different areas, gives us the toolkit to identify and act on the best opportunities.
Tom: With recovery investing, I believe that we are doing something difficult, but worthwhile. We benefit from having a very clear, tried and tested investment mandate, which we stick to regardless of what the market throws at us. It’s a very simple investment approach.
I am hopeful that with the support of my colleagues, hard work and some good luck, we can continue to do our best to develop the Recovery Fund and the Global Recovery Fund, and ultimately help our investors realise their own long-term aspirations. We are very mindful of the tremendous support we have received from our customers over the years and are extremely grateful to them.