Lightbulb moment?

UK best ideas funds have performed relatively poorly over the five-year period since their launch in 2006, as volatility in the market took its toll on the high-conviction portfolios.

The funds, which are run by Skandia and Franklin Templeton, have a number of managers who each run a mandate with a limited number of stocks.

The Skandia £149m UK best ideas fund has six managers, each running 10 stocks, and Franklin Templeton’s £28.8m UK managers’ focus fund has four managers running up to 37 stocks.

The Skandia UK best ideas fund is down by 4.9 per cent over five years to October 11, compared with returns of 8.3 per cent over a three-year period to the same date.

Franklin Templeton’s UK managers’ focus fund is up by 2.7 per cent over a five-year period to October 11, compared with returns of 16.1 per cent over three years.
The UK all-companies sector returned an average of 3.2 per cent over five years to October 11.

Skandia best ideas portfolio manager Lee Freeman-Shor says he is disappointed with the five-year performance of the UK best ideas fund and is taking steps to improve returns.

He says: “The funds struggle in falling and risk-off markets, as in August and September this year and in 2008. Managers invest in stocks that have been hammered, with the view to making money on them in the coming years. That causes short-term performance pain.

“I have put in place a new process for assessing the managers on the best ideas funds on the back of what we learnt from the disappointing performance in 2008 and 2009.”

As a result, four managers on the fund were axed in 2010, including Jupiter income and UK equities head Anthony Nutt, Cartesian co-founder David Stevenson, River and Mercantile UK equity fund manager Dan Hanbury and Axa Framlington UK equity income manager George Luckraft.

The fund now has mandates run by F&C head of UK equities Peter Lees, Schroders head of UK equities Richard Buxton, BlackRock UK special situations fund manager Richard Plackett, Kames Capital UK equity investment manager Audrey Ryan, Liontrust European equities fund managers James Inglis-Jones and Gary West and head of UK mid and small-cap equities at Old Mutual Asset Managers Dan Nikols.

Freeman-Shor believes that implementing these changes has improved performance, as has a new requirement for the mandate to outperform the manager’s retail fund or funds.

The Franklin Templeton UK managers’ focus fund has mandates run by equity income manager Colin Morton, mid-cap manager Paul Spencer, UK select growth manager Mark Hall and smaller companies manager Stuart Sharp.

The portfolio is invested between 45 per cent large cap and 55 per cent small and mid cap. The managers look at performance over three years.

Morton says: “It can be a bit riskier because of the type of fund. If something has been oversold or something has happened to a particular stock, we do have the option to be a bit more short term.

“We have struggled a bit relative to the UK all-companies sector as we are overweight mid and small cap and they have been hit worse than bigger companies in the last month or two but we believe mid and small cap can make good money over the long term.”