Skandia UK Best Ideas may be merging, but high conviction fund management still relevant

4th March 2013

img

Around the start of the last decade, high conviction investing came into vogue in the retail market with fund firms creating funds that relied on fund managers’ best ideas writes Cherry Reynard. Then Skandia took it one step further by combining the high conviction ideas into a multi-manager fund.

Now the Skandia UK Best Ideas fund has been merged into Simon Murphy’s £80m Old Mutual UK Equity fund as trade website Money Marketing reported last week.

The justification runs that the two funds were following similar investment objectives and, therefore, after the merger of fund managers Skandia and Old Mutual, it made sense to pull the two together. But is this a reflection on the strength or otherwise of the wider ‘best ideas’ concept?

Has the apparently seductive concept of a concentrated portfolio of a skilled fund manager’s highest conviction holdings worked in practice?

The concept of a ‘best ideas’ fund became popular in the early 2000s, with the launch of funds such as the Schroder UK Alpha Plus fund. The idea was to take a proven fund manager and create a fund out of their highest conviction ideas and watch it deliver top returns to investors.  Skandia took the concept slightly further, appointing 10 top managers to each give their best ideas and creating a pooled fund out the results.

The concept has by no means been a failure for Skandia, or indeed many other groups. The Skandia fund is top quartile over one and three years, and has outperformed the Old Mutual UK Equity fund over three years by around six per cent (though five year performance is weaker). If there has been a weakness to the Skandia fund it is that it has been naturally bullish. It was hit hard in 2008 and again in 2011 and the Old Mutual fund has been better at preserving capital. It should be said that Skandia is retaining all its other ‘best ideas’ funds including the global and European versions, so the firm is clearly not unhappy with the concept generally.

Elsewhere, ‘alpha’ or ‘best ideas’ funds will tend to be at the top or bottom of the performance tables. For example, in the UK All Companies sector over five years, at the top are funds such as the Standard Life UK Equity Unconstrained and L&G UK Alpha funds. The Schroders UK Alpha fund is top quartile over one, three and five years, despite its £3.6bn size which often makes funds unwieldy. At the bottom there are funds such as the JPM UK Dynamic and the Barclays UK Alpha. The ‘best ideas’ concept is a concentrated version of a manager’s skill or a concentrated version of his or her lack of skill.

However, research suggests that best ideas funds have, on the whole, delivered good performance. Ft.com analysed Morningstar data and found that funds with fewer holdings had delivered higher returns than less concentrated vehicles over both the past three and five years. It said: “For funds in the UK All Companies sector, a fund with twice as many holdings as a rival has typically produced returns that are 9.2 per cent lower than its more concentrated peer over the past three years.”

Darius McDermott, Chelsea Financial Services, says that the ‘best ideas’ concept has been delivered in a number of ways, including the Skandia subcontracted model, but he prefers funds that are simply more concentrated and the best ideas of one manager or single fund firm. He adds: “We have a number of this type of fund on our Selection buy list. Examples are Schroder UK Alpha, J O Hambro UK Opportunities, Liontrust Special Situations and Jupiter European. This high conviction way of investing can work well and be very rewarding. Of course, if the conviction is wrongly placed it can also go very wrong so these funds are higher risk.”

The success or otherwise of ‘best ideas’ funds may be important to the long-run success of the active management industry. Groups such as Schroders and JP Morgan Asset Management are reorganising their fund ranges on the premise that investors in future will either want ‘low cost’ and quasi-passive, or very active and high conviction. They will not be willing to pay for a hybrid of the two – i.e. a fund with a higher ‘active’ charging structure that doesn’t take strong positions.

Therefore it seems that the Skandia closure/merger is not an indictment of the concept of a ‘best ideas’ portfolio. This style of fund, when managed by skilled managers, has generally delivered good returns to investors. In fact, it is increasingly being adopted into mainstream fund management as investors demand an active manager who is truly active.

11 thoughts on “Skandia UK Best Ideas may be merging, but high conviction fund management still relevant”

  1. dutch says:

    At least prices are going up there.The BoJ will be stoked.

    1. Anonymous says:

      Hi Dutch

      Actually it is troubled that people do not fully believe it will hit the 2% inflation target. It published a working paper on inflation expectations last week with this in it.

      “Nevertheless, relatively few market participants forecast inflation of 2% and the mean of 10-year expectations remains below the “price stability target of 2%.”

      This theme is also in the speeches from BoJ Board Members which often imply a close but no cigar line…A bit like the fact that it has got 1.3% inflation (excluding food) so far but not 2%.

  2. Anonymous says:

    Is Abenomics the cause of inflation and currency weakness ? or is it just coincidental to the timing of the balance of trade deterioration and increased energy import costs ?

  3. Rods says:

    Hi Shaun,

    Abenomics reminds me of US cartoons of my childhood. When the character runs off cliff and carries on running like nothing has changed. Then inevitably gravity takes over along with the realization of their predicament and you see them trying to climb in air back up the cliff, the climbing up the cliff part is Abenomics. Eventually…, well all know what happens when the said character reaches terra-firma!

    The reality is that spiraling government debt is beyond the point of no return, all they can do is try to inflate it away, by pumping up the volume and in my view this can kicking exercise will fail.

    Apparently, gold sales are doing very well at the moment where there will come a point when a kilo of 1 zillion Yen notes in one pocket will be worth considerably less than half an ounce of gold in the other.

    Countries can end up so awash with debt, that even having the ability to print whatever it takes will make no difference, as the smart money leaves or has left along with many businesses and is any canny investor going to invest in an economic basket case, before the reset button is pressed?

    1. Anonymous says:

      Hi Rods

      The Japanese situation is an example of what Winston Churchill called “It is a riddle wrapped in a mystery inside an enigma”.

      If we look at the Japanese Government Bond market we see a national debt of around 230% of GDP combining with a ten-year bond yield of 0.61% which shouldn’t coexist but it does. If we explain it by saying that the Japanese mostly buy their own bonds we now have the problem of inflation at 1.5% and inflation expectations which are now more positive. So again the JGB 10 year yield should not be 0.61% but we know it is.

      Your cartoon analogy is a good one and I too saw plenty of these plunges off a cliff as a child. However the cartoon characters usually survived one way or another didn’t they?

  4. Paul C says:

    Shaun, it would seem the land of Nippon has got it right. the Government raises price/tax and in concert tells all the major suppliers to raise their product and service selling prices then when you add up all the totals at the end of the year……. hey presto GDP has gone up, more has been taxed and shipped ( in money counting terms). Could be the reason for yesterdays’rosy UK numbers, it is all up everywhere!

    N.B. except real output.

    1. Anonymous says:

      Hi Paul C

      I tend to share your suspicion that the way that officials and many economists treat low inflation hints that they are keen on it being high enough that they can slip some of it into (claimed) economic growth…

  5. Anonymous says:

    I predicted Japan would quickly restart the reactors. I was wrong.

    We know that Fukushima went badly wrong, and they had huge difficulties controlling/cooling the critical piles of uranium. They wouldn’t tell us about near misses – what don’t we know ?

    I don’t think they have completed a what went wrong and how we’d prevent it next time exercise.

    The nuclear regulators could arrange a quick response emergency generator team, with stockpiles of fuel and aerial transport in case of a future water cooled reactor emergency.

  6. Anonymous says:

    Hi Forbin

    To your question I would reply that classic or past economics failed and has been replaced, by those who have thought about what has happened anyway! But it is also true that quite a few markets are now rigged and mostly by central banks.

    As to popcorn in Dune I do not recall it. However it is still getting more expensive as today the price of corn rose another 1%.

  7. forbin says:

    economically they need to start the reactor

    Engineering wise they have made and still are making from what I can tell a complete SNAFU of the situation

    I was surpised at first at the apparent non starting of the reactors but if you read up on whats happened – some taken with salt of course but always with the caveat that the secrecy level is high with these guys then I do wonder if what they found makes them $h!t scared of the next one……

    and yes I’m pro nuclear but with the caveat they you are dealing with the devil …….

    Forbin

  8. Anonymous says:

    Economically the case to restart is very strong. Makes me wonder what safety issues they aren’t telling us about ….

    I had a read thru the 4th gen reactor designs on the weekend. I was not convinced the new water cooled designs are any safer, they are just about cheaper power. VHTR Gas cooled is much simpler – no steam explosion worries, no loss of cooling fluid worries, no blockage worries, no pump failure worries, no void co-efficient management and no need for 100% guaranteed backup power supply. We need nuclear power and we need to design better than these water cooled time bombs.

Leave a Reply

Your email address will not be published. Required fields are marked *