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Encounters of the third kind

I must admit that after Skandia brought out global best ideas and then UK best ideas, I thought it might have trouble thinking up another fund for a third launch. I have to hand it to Skandia, the new UK strategic best ideas fund looks to be yet another truly innovative fund.

Yet again, the focus is on a high-quality line-up of fund managers. I see this as the most important aspect of the whole range.

Most fund managers will tell you they are stockpickers. However, our analysis suggests that the vast majority add little or no value to returns that cannot be attributed to their size or style bias. Nobody can predict the short-term direction of stockmarkets but I think it is important to invest with managers who have demonstrated skill in adding value through stock selection.

How does this fund dovetail with Skandia’s existing UK best ideas fund? The original can only benefit from managers identifying stocks that may rise. The new fund is fundamentally different because the managers have the ability to go short. This creates a much bigger range of opportunities where they can make money. I realise the cynics among you will say it just gives them more chances to get things wrong.

That is true but note that this fund does not merely copy the original line-up. This is important because Skandia has gone out to seek fund managers who have a track record of shorting stocks too.

In the new fund, you will see names that may be unfamiliar because they do not run retail money, such as John Wood at Artemis and Charles Tritton who is responsible for New Star’s alternative investment business and risk management.

One worthy luminary you will know is Colin McLean, founder and chief executive of SVM, a manager and indeed a group that are often unfairly overlooked. Another example is Tim Russell, who has not enjoyed the best of periods on his long-only fund but has been doing a fantastic job on the hedge fund at Cazenove.

Skandia has tried to keep the brief as flexible as possible. Each manager can flex the number of long ideas and short ideas to the extent that all their 10 positions can be long if that is where they see the most potential return. However, they can have up to five short ideas to provide some support in tougher times and take advantage of select opportunities in troubled stocks.

Once again, Skandia is trying to blend a number of different fund managers and styles to create a diversified portfolio. Given the capacity to short, I would expect this fund to outperform in a bear market but it may perhaps underperform during a raging bull market despite the potential for the managers to go 100 per cent long. However, over a market cycle, you would hope that the fund would be rather like the tortoise to the hare and win the race in the long term.

If there is a problem in recommending this fund, it lies in trying to explain shorting to clients. After all, the idea of selling something that you do not own is completely illogical. This is a case when working through some examples will make the process much clearer.

The other potential problem may be that hedging does not necessarily have a great name at the moment. However, intermediaries should point out to private clients that the phrase “hedge fund” has been very badly misused. The failing funds that have hit the headlines are not what I would call proper hedge funds but are little more than gambling funds.

Skandia’s fund has no borrowings and is using shorting in the way that it was always intended. I believe this new fund makes an ideal component for a UK equity portfolio.

Mark Dampier is head of research at Hargreaves Lansdown

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