4th March 2013
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.