Ahmet Feridun, an investment director at Cazenove Capital which oversees some £40bn of assets, has revealed how he goes about choosing funds.
Cazenove is owned by Schroders and, alongside Benchmark Capital, Schroders Wealth Management and Schroders Personal Wealth, forms the company’s wealth management unit. It is reputed to be the Queen's broker.
The assets under management of the entire wealth management unit is £81.6bn with around half of this coming from Cazenove Capital.
Feridun said: “In a stagflationary environment, the mix of assets needs to change. For 50 years, bonds provided a good ballast in portfolios, and also paid an income. But over the past decade they have been more correlated with equities, and there isn’t much income.
"We have been looking at alternative income products across all of the portfolios, as well as at increased equity exposure. But the one thing we don’t want to do is just chase higher yields, as one can end up in value trap type investments then.”
When it comes to selecting the funds which go on the company's buy list he said there was no "hard and fast rules" around fund size, but it is something the firm watches closely.
Feridun said: "For example, some smaller funds get good performance by being overweight small and mid cap equities, but as those funds get bigger, they can’t have the same exposure to that part of the market as before, and performance is impacted.”
He tends to divide the UK equity fund list, for example, into three segments, value funds, core funds and growth funds, and depending on market view, may also allocate to small cap funds.
Feridun said: “We look at when the outperformance of each fund happens, during what period of the cycle. Then we seek the fund manager’s view on that, we want to understand their process.
"If they get through that stage, we then have a second meeting with them, we go through stock examples with them, to understand how individual stocks fit into their way of investing. One of the things we focus on at this point is position sizing, that is, how much they would commit to each stock, we want to test that. And then we would focus on some of a manager’s recent investments that have gone wrong.
He added: "We want to know if they understand what went wrong, if they properly understand it, and what lessons they have taken from it. And if they get through that stage, then it goes before our research committee, who may give it the green light to go on our list, or may say more work needs to be done, and it can go on the list in perhaps a couple of years.”
Feridun said active fund management fees have come down in recent years as a result of the growth of ETFs.