By MARK HINTON 05/10/2007
The Skandia UK Strategic Best Ideas Fund is now available on fund supermarkets. Skandia have blended together a high quality group of 10 investment managers and given them each the freedom to select ten stock ideas with the objective to make money out of both rising and falling shares.
The remit is UK focussed and has few constraints imposed. Essentially investors are reliant on manager stock selection skills. The final portfolio is diversified across the UK market capitalisation range with up to 100 ideas. Skandia monitor individual manager performance and may change a manager at any time but they do not enforce a top down view of the UK economy so any sector allocation is purely a function of the stock ideas.
How do managers make money from falling stocks?
The fund is taking advantage of the UCITS III regulations to use derivatives to short stocks, protecting the portfolio from falling share prices. It thus differentiates itself from the Skandia UK Best Ideas fund by allowing the managers to take 'short' positions in stocks that they expect to underperform as well as 'long' positions in stocks that appear undervalued, adjusting exposure strategically depending on market conditions.
Market exposure - attempting to make money in all environments
Each manager may select up to 5 out of their 10 ideas as stocks they feel will fall in price and ‘short’ the stock. Managers can thus adjust market exposure to 50-100% long or up to 50% short. This means that when a manager is bearish of the market he is able to utilise both cash (up to 25% of his allocation) as well as shorting up to half his allocation. When positive on markets, a manager is able to be fully exposed with all his ideas in long positions.
How could this fund react in different market environments?
In general, expect this fund to outperform a traditional equity fund in falling or stable markets and lag a strong market. Volatility may be lower than traditional long only funds with managers able to adjust market exposure.
10 managers of the Skandia UK Strategic Best Ideas Fund
Richard Plackett - Blackrock
Tim Russell - Cazenove
George Luckraft - AxaFramlington
John Wood - Artemis
Mark Lyttleton - Blackrock
Ashley Willing & Simon King - Gartmore
Charles Tritton - New Star
Paul Findley - Threadneedle
Andrew Kelly and David Stevenson - Resolution Cartesian
Colin McLean - SVM
All these managers have experience managing funds that are able to short stocks. The majority of them are highly rated internally within Bestinvest, whilst others such as John Wood at Artemis are only usually available to institutional investors.
Suitability
We see this investment style as a useful component in properly diversified portfolios. It is also potentially a good diversifier to the Blackrock UK Absolute Fund that has recently been made available on fund supermarkets with the aim of generating positive absolute returns in all market conditions.
In general, it is recommended that portfolios incorporate some exposure to alternative assets classes such as hedge funds that reduce overall portfolio risk over time. Whilst Skandia UK Strategic Best Ideas is not a hedge fund, it does share some hedge fund characteristics such as the ability to short stocks and make money in all market environments.
Previously on fund supermarkets, investors have been restricted to ‘long only’ equity funds, which tend to rise and fall with the market.
Costs
The Total Expense Ratio (TER) is high at 2.45% and performance will need to be good to justify these charges. However, the view could be taken that you usually need to pay up for quality, and these managers are amongst the best in our industry.
Skandia will monitor the underlying managers and the stock positions they take and are able to replace a manager who does not fulfil expectations at one day’s notice, if necessary.