Secrets Of Success: I'll take a gamble on ten of the best

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The Independent Online

Having had another dig at the general issue of high-cost funds last week, this week I want to return to take a look at a fund idea that I mentioned earlier in the summer as being worth investigating. I see no reason to change my mind - even though cost is actually its biggest negative.

This is the Skandia Global Best Ideas fund, in which 10 fund managers from different groups each pick 10 stocks that represent their highest conviction share-picking ideas. These are then combined into a single portfolio. Skandia has since added a second fund that covers the UK market only.

On the face of it, I freely admit, this should not be my kind of fund. There is a slight feel of the gimmicky about it. The fees are high - the total expense ratio is 2.5 per cent, which is clearly a big potential drag on performance. And the methodology is new and untested in real life. There is no track record for this particular way of constructing a fund.

Nevertheless I think the idea is sufficiently interesting to give it a run in my own portfolio, for the following reasons. The first and most important is that the managers Skandia have chosen include a fair number of the names that would feature on my list of the best stock-pickers in the business, and about whom few professionals, I think, would disagree.

The five UK equity managers who invest the UK portion of the Global fund and also feature in the separate UK fund look especially strong: Richard Plackett of Merrill Lynch, Mark Tyndall of Artemis, Roger Whiteoak of Axa Framlington, Stephen Whittaker of New Star, and Ashley Willing of Gartmore.

They all have good track records and, just as importantly, reputations. (Although Mark Tyndall now spends the bulk of his time running the Artemis business, he can draw on the firm's successful stockpicking methodology).

Of course, you could always buy whole funds run by these individuals, so one obvious question that arises is: why opt for a fund that in essence simply mixes up their best ideas? Given that they all have very different styles of investing, there is clearly a risk that the end result will be a hotchpotch, or a high-cost index fund by another name, rather than a coherent investment portfolio.

In this case, however, there are some reasons, though obviously untested, for thinking that things might come out differently. For one thing, all good fund managers are driven by a keenly developed competitive instinct; and it is natural to expect them to put particular effort into a high-profile exercise of this sort. That is borne out by the eagerness of many of those involved to be chosen for this particular exercise.

For another, having to pick 10 good ideas only is a lot easier than populating a portfolio of 100 or 200 stocks. While they are unlikely to admit it in public, even fund managers with strong research support and an intimate knowledge of their markets will struggle to find more than 10 stocks at any one time about which they have particularly strong convictions. This is especially so if they operate in segments of the market, such as UK large cap stocks, which are already intensively researched.

Intuitively, therefore, what makes the concept of a Best Ideas fund attractive is that it is rooted in an important market reality. Most funds are built around a laudable objective - let us try to outperform the average - but a questionable premise - that it can in practice be done. The assumption behind the Best Ideas funds is that the 10 best ideas of a good fund manager have a better chance of outperforming the market than their 100 best ideas. It is more plausible.

The practical questions to be determined if you follow the logic so far are therefore: can the managers of the Skandia funds actually be certain they are getting the best ideas from those involved? And how will the resulting portfolio behave? Will the competing styles and approaches cancel each other out or will there be some genuine added value at the end of the process, which is what ultimately matters? And will the higher than average costs kill any advantage that does accrue in this way?

Clearly these are early days to form a conclusive judgement. The first best ideas fund, the one with the global remit, has only been running for four months while the second UK best ideas fund only kicked off last month. For what it is worth, they have both got off to a strong start, with the global fund up by just over 15 per cent since its launch in June and the UK fund by around 5 per cent. Both are ahead of their benchmarks.

As for the process, having spent some time talking to Skandia's CIO Alan Durrant, I am satisfied that a good deal of intelligent thought has gone into the practical question of how the fund should be constructed. It is not as easy as you might think from a technical and regulatory perspective to put together a fund of this kind. This is one reason why there may not be as many "me too" best-ideas funds as you would normally find after a successful fund launch.

Each of the 10 fund managers has the freedom to vary the size of their 10 holdings, subject to the rule that they cannot have more than 20 per cent, or less than 5 per cent, of their allocated space in the fund in any one stock.

There is nothing to stop different fund managers from picking the same stock. To date in the UK, 12 stocks have been chosen by more than one manager and two (easyJet and XStrata) have been chosen by three different managers. EasyJet is the fund's largest single holding.

The fund will not be producing a league table of which fund manager is doing best with his stock picks, or disclosing the full list of portfolio holdings. This is actually sensible, as investors will gain nothing by turning the exercise into a short-term racing spectacle.

Experience also suggests that the best stock picks, especially in the smaller companies area, take time to mature. Instinct tells me that these funds, as the first of their kind, will probably do well, despite their cost disadvantage.

jd@independent-investor.com

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