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Skandia takes the long and short route

Skandia Investment Management

UK Strategic Best Ideas Fund

Type: Multi-manager Oeic

Aim: Growth and income by investing in UK equities and equity related securities, including derivatives, using a manager of managers approach

Minimum investment: Lump sum £1,000, monthly £50

Investment split: 100% in UK equities and equity related securities

Isa link: Yes

Pep transfers: Yes

Charges: Initial 5%, annual 1.5%

Commission: Initial 3.5%, renewal 0.5%

Tel: 020 7220 3531

The UK strategic best ideas fund has the same framework as the other two funds in Skandia’s best ideas range in that 10 managers will select their 10 best stock ideas. The difference is that the new fund allows the managers to create synthetic short positions using derivatives.

Michael Philips proprietor Michael Both says: “If one believes that good managers will beat passive index trackers over time, then it is hard to fault the logic of employing good ones to manage your clients’ money. Skandia’s UK Best Ideas series has started off very well, significantly outperforming the FTSE 100 since launch.

“The strategic version takes the concept much further by allowing a significant portion of the portfolio to bet on market falls, which could be most beneficial if the UK market takes a battering.”

Both believes the low minimum investment makes it accessible to any investor. He observes that the fund may be very diversified, with 10 managers picking their 10 best ideas. “Skandia has not indicated whether it has imposed any restriction on the same shares being selected by all parties leading to a concentration of only 10 equities,” says Both.

Discussing the potential drawbacks, Both says: “It is difficult to pigeonhole the fund, but it could be described as a sort of UK equity quasi-total return fund. Since Skandia has embraced the idea of allowing fund managers to go short, there could have been a better explanation as to why defensive positions are limited to five long and five short positions plus 25 per cent cash.”

Both says it is unclear from the literature what weightings each of the 10 manager’s share picks can have. “One must assume the cash would have come from the short positions, because five long positions are held. Skandia doesn’t explicitly say that 25 per cent will be used to load up the long positions, but if only 25 per cent can be held as cash and only five short positions may be taken, there may be no alternative. There is a bizarre situation where the more bearish the manager, the more he is forced to gear up his long positions.”

Both points out that the extreme position would be if five shares were shorted then half of that 50 per cent would load up the long positions, building them up to 75 per cent, while keeping 25 per cent in cash. This is a total of 200 per cent gearing on the net asset value, which is a 150/50 fund.
“In other words, investors may be very unclear on the level of gearing and the riskiness of the fund. I question why Skandia does not also allow the managers to take positions on fixed interest instruments, since interest rate bets will surely underlie much of their fundamental thinking? Perhaps that will be in a later issue,” says Both.

Both suggests competition will come from the Investec global extension, F&C enhanced alpha UK equity and UBS US 130/30 equity funds.
Summing up he says: “Many long/short funds and 130/30s have failed to live up to their hype. The danger of having 10 managers picking 10 funds is that one could end up with all 100 stocks of the FTSE 100 – although if half were long and half short that may be no bad thing. This would rather defeat the object of picking the best ideas.”

Both feels that Skandia’s literature is less than comprehensive on this point. “As a responsible IFA one would need to be much clearer on the inner workings and risk controls of this type of fund.

“While the practice of shorting is very well established for professionals day trading in futures markets, especially commodities, it has only been made available to the general public for UK equities relatively recently and care must be taken to ensure clients fully understand that the potential for gaining if the market falls equates to losing if it rises. “ He adds that running a long only equity fund is different from managing an absolute return fund and only time will tell if all the managers have the full skill set for stock picking and risk management.

Both concludes: “I would like to have seen the managers’ remuneration linked to the absolute return of their fund and a hurdle rate before they get paid any bonus, since there is no better incentive than his wallet for aligning a fund manager’s interest with the value of his clients’ portfolio.”

BROKER RATINGS

Suitability to market: Good
Investment strategy: Good
Charges: Good
Adviser remuneration: Good

Overall 8/10

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