Hedging strategy a key factor in Skandia manager switch
Skandia Investment Group (SIG) has switched to a new large-cap manager for its $350 million retail global equity fund after more than six years with JP Morgan Asset Management.
The firm, which is the wholly owned manager-of-managers business in the long-term savings division of Old Mutual Group, has selected Five Oceans Asset Management for the long-only mandate ahead of four other finalists in the last round.
Five Oceans was set up in 2005 and has 11 staff based in Sydney and Melbourne managing almost $1 billion in assets. The lead portfolio manager is Christopher Seith.
The house takes a bottom-up, stock specific view of the most liquid, large-cap equities globally, with a top-down sector screen. And it tends not to rely on forecast future earnings, notes Jane Fung, Asia managing director for SIG.
"[Five Oceans] think if you go to visit a lot of these seasoned management teams and talk to them you might get misguided by them," says Fung. "What they do is look at the current price of the stock, as they believe the profitability history and cashflow path is already implicit in that. They rely a lot on what they see today rather than what they can extrapolate [about the future]."
She notes that another appeal for SIG was that Five Oceans seeks to manage volatility by using options if they are uncertain about the stock price.
"If they like the stock but do not know if the price is right, they try and put a call in. They use a price limit, and when they see the price getting to a certain level, they put the hedge on.
"They also realise a lot of people who play the derivatives markets might not know the stock story very well as they are not fundamentalists. So by knowing the stock and taking advantage of options mispricing, they are able to buy stock insurance whenever they see it as necessary."
The issue of managing volatility is an important one for SIG, which notes that it decided the time was right to part company from the dynamic macro allocation strategy employed by JP Morgan AM.
Fung suggests that the nature of the global equity mandate has changed in accordance with altered market conditions, noting that JP Morgan's style was good for a while, rebalancing on a monthly basis from a quantitative ranking perspective, getting rid of bottom-ranking stocks.
"When the market was coming up it was good," she says, with JP Morgan having taken on the SIG global equity mandate in December 2005. "But when the market went sideways, it became difficult and you almost defeat yourself because the monthly rebalancing became an expensive exercise. We did not think that was working well in the last couple of years."
SIG's retail global equity fund typically holds 60 to 80 stocks with any one representing no more than 8% of the portfolio (as a general rule). Fung says the expected net equity exposure is 60-100%, and estimates that about one fifth of the stocks in the portfolio have insurance on them.
She adds that the retail fund has seen healthy take-up from private banks, with potential interest from family offices as well.
SIG distributes internally across Skandia and Old Mutual's business units as well, has around 120 staff and manages £14.3 billion ($22.6 billion) as at June 30, 2011.