Skandia Investment Group was forced to take evasive action on its UK best ideas fund earlier this year after several underlying managers failed to capture the market rally in 2009.
The fund launched as an industry innovation in 2006, with the group asking 10 managers from different houses to pick their 10 favourite companies for a 100-stock portfolio.
Senior fund manager at the group Ryan Hughes says the aim was to offer a well-diversified UK equity offer-ing entirely made up of conv-iction ideas, with none of the index-hugging ballast usually included in such a vehicle.
As with the global version that launched earlier in 2006, UK best ideas got off to a strong start in performance terms, largely due to stock selection in the small and mid-cap space. Like many funds, it fell off the rails during the credit crunch, when risk was not rewarded in return terms, according to Hughes.
He says: “Anything that was not big and liquid was marked down substantially and our managers proved too aggressive and too far down the market cap scale in such an environment.”
After a poor 2008, Skandia was expecting a considerable bounce from its best ideas franchise as the market rallied after March, partic-ularly due to the higherbeta nature of the range, but this failed to emerge on the UK fund.
As the global and European best ideas portfolios did recover as expected, Skandia CIO James Millard and team embarked on a full and radical review of the UK manager line-up at the end of last year.
As a result of this work, the number of managers fell from 10 to six, with the line-up now consisting of Aegon’s Audrey Ryan, Jacob de Tusch-Lec at Artemis, Richard Plackett at BlackRock, Old Mutual’s Luke Kerr, Richard Buxton at Schroders and Hector Kilpatrick at SVM.
The group shed the Ignis Cartesian duo of Andrew Kelly and David Stevenson, Jupiter’s Tony Nutt River & Mercantile’s Dan Hanbury and George Luckraft from Axa Fram-lington – although the latter remained slightly longer as he unwound some smaller positions.
These changes have now yielded the expected reco-very in fund performance and UK best ideas is around 10 per cent ahead of the FTSE all-share year to date.
It has also ascended to the upper second quartile of the UK all companies sector over one year although Hughes admits the three-year and since launch numbers still need work.
He says: “What we learnt from this overhaul is that there are UK equity mana-gers more suited to a 10-stock portfolio than others and we feel the six remaining can successfully run such a concentrated company list.
“We have retained mana-gers able to rotate with the market and increase risk as well as take profits where necessary. Those cut are good managers but our view is that the six now in place can concentrate down their process to 10 stocks and deliver the focused alpha that we expect.”
With more volatility expected in markets over the coming years, Hughes says the remaining managers are willing to work with that to generate performance.
Skandia also cites the peculiarities of UK equities for the slow recovery of the UK product, with the market concentrated in certain sectors. He says: “Last year came down to an almost binary bet on miners and financials and anyone not in those sectors under-performed. Some of our managers proved not flexible enough to find those ideas and we are confident that the amended line-up can outper-form in all market conditions.”
While UK best ideas is the culmination of ideas from six individuals, Hughes says turnover is not particularly high, with a blend of more and less active traders.
Engineering company Aveva has been in the fund since day one, for example.
Xstrata is currently the biggest holding at around 5 per cent and there are only five or six stock overlaps between managers against 15 when 10 were involved.
Skandia also refutes the idea that managers’ best ideas will also be more volatile positions although Hughes admits that favourite stocks are typically more skewed to upside potential than protecting on the downside.
“All our managers have a mandate to outperform the index, which means the portfolio should be exposed to different catalysts and drivers of performance over a multi-year period,” he says.