The manager of the Fidelity China Special Situations trust is wary about the EV market.
China has been a challenging place to invest over the past few years but for investors who want to gain exposure to the market, the Fidelity China Special Situations trust could be a strong option.
It has remained on top of its sector over most timeframes and continues to be highlighted by experts as one of the best-known vehicles run by Fidelity.
China remains as relevant as ever but equally hard to predict. The launch of AI chatbot DeepSeek sent shockwaves in the technology market last week, but returns were stifled, as the chart below shows, as Donald Trump’s tariffs threat kept the market under scrutiny.
Below, Fidelity manager Dale Nicholls tells Trustnet how he avoids value traps, why not owning Xiaomi is his biggest mistake of the year and talks about the future of electric vehicles (EVs).
Performance of sectors and index over the year to date
Source: FE Analytics
How do you select companies for your portfolio?
I buy companies that trade at significant discounts to their intrinsic value. To establish what that value is, I look at three things. First, how big a business can be in the next five, 10 and 15 years, given the state of the industry and how the company is positioned in it.
Second, I study its competitive advantage and how that is likely to change in the future as I try to find out about the incremental returns on capital the company can generate. The third element is management – you can have a great business, but management needs to execute on that.
Of the three, which drives returns the most?
In the long term, it's the quality of the business. A key part of meeting with companies is understanding the competitive moats, how they are changing and why. We are always going into meetings trying to understand the structure of an industry and the competitive edges. That's probably the most important thing.
Does this process steer you toward any particular sector or style?
Style-wise, we spread the net very wide. Smaller companies are a big part of the market we play in, as they come with less information and therefore more mispricing. The process is very bottom-up and focused on individual companies.
How do you avoid value traps?
If a company is cheap and going nowhere, it’s because it is not creating value. If it’s creating value and adding cash to the balance sheet but trading below net cash, then something strategic will happen – the market will recognise that, it may privatise or an acquirer steps in.
If a company is creating value, something has to give over time. But as a manager you have to get the thesis right in the first place.
When was the last time you got a thesis wrong?
My biggest mistake in the past 12 months has been not owning Xiaomi, underestimating its ability to execute in a top market. I viewed the handset market as a tough one for eking out decent returns but Xiaomi has done very well with the supply chain by integrating its own chips.
It is also going into electric vehicles (EVs) and the new model has hit the right price point, the right functionality and was branded very well. Frankly, I've underestimated the markets interpretation of that as well. The stock has gone to valuations that I wouldn't have expected.
Are you still happy not owning it?
I am reasonably comfortable not owning it at this type of valuation. Also the EV space, although Xiaomi is doing extremely well there, is going to be quite competitive. It's hard for me to imagine that we will have the same number of players that we have now in five to 10 years, there has to be consolidation.
It’s a big technology transition with lots of new players and at the same time, the incumbents are bringing out more as well. It will be tough.
What was the best contributor of the past year?
Hesai Technology contributed close to 2% in 2024. It makes sensing tools with multiple applications but it will be increasingly important in autonomous driving. We are just on the cusp of a really significant growth as this technology becomes the core sensing tool by which autonomous cars create a 3D image of objects that are ahead of them.
And the worst?
Auto and maintenance service provider Tuhu Car's contribution to relative return was -0.3% in 2024.
Tuhu created a highly scalable, capital-light model and has consolidated its position as the largest player. In 2024, its store revenue trended down due to current deflationary pressure from the entire sector and motor oil price decline driven by consumption downgrade.
However, store growth and sales volume remained steady, so we could still see operating leverage if consumption recovers. The company also has substantial margin expansion potential through private-label products, offline traffic growth, and enhanced chassis services.
Insurers, with names such as Ping An Insurance, also did worse than expectations. I like the insurance space over the long term in China, it fits the definition of a very cheap growth sector, as life insurance penetration is still quite low and has the potential to grow as the consumer becomes richer and seeks more protection. In the shorter term, interest rate cuts are a headwind.
Who is this fund for?
It can be for anyone. China scores at a high-teen percentage of global GDP and continues to outgrow the world, and yet it's less than 3% of global portfolios.
It is extremely out of favour. By our numbers, it is close to the widest discount it has ever traded to the US market, approaching a 60% discount for comparable levels of growth.
Investors may need a bit of a contrarian mindset, as there is definitely fear out there. But as Warren Buffett would say, the time to be greedy is when there is fear.
What do you do outside of work?
I try to keep fit with meditation, yoga and exercise, and then the other escape for me is cooking. This is where the Aussie comes through, barbecue is a big thing for me.
Higher and more volatile inflation and the rapid rise of private markets are reshaping how portfolios are constructed and managed.
The rules of investing are being rewritten. Traditional public markets, once the cornerstone of a diversified portfolio, may no longer be sufficient to deliver the resilience and returns investors require in today’s environment. Higher and more volatile inflation and the rapid rise of private markets are reshaping how portfolios are constructed and managed.
Defining private market alternatives
‘Alternatives’ is often used as a broad term to describe any asset class outside of publicly traded stocks and bonds.
While it’s become common practice to lump alternatives together, grouping every asset class – such as private equity or global infrastructure – under a single label risks oversimplification.
Each asset class has a different risk and return profile and can serve a different purpose within a portfolio. Private equity, for example, focuses on long-term growth, while infrastructure offers steady cash flows and inflation protection.
Though the reasons for incorporating private market alternatives are becoming clearer, the specifics of what, how and which alternatives to choose remain less defined. The following four guiding principles aim to demystify the complex world of alternatives and provide a practical framework for effectively integrating these assets and strategies.
Focus on outcomes, not labels
Investors often gravitate towards predefined categories like private equity or hedge funds without fully considering whether these strategies align with their specific goals. This can divert attention from the real objective: enhancing portfolio performance by improving returns, reducing risk or achieving specific outcomes such as inflation protection or income generation.
Instead of viewing alternatives as isolated asset classes, they should be reframed through their core contributions to a portfolio.
Alternatives offer return enhancement opportunities by unlocking excess returns through active management and their illiquidity premium. They provide stable income streams often protected from inflation and offer diversification by introducing exposures uncorrelated with public markets. By recognising the role alternatives can play in complementing traditional portfolios, investors can cut through complexity and focus on matching each alternative investment to their specific challenges and objectives.
Source: J.P. Morgan Asset Management, as of Dec 2024. Equity diversification score is based on long-term public equity beta; income-driven returns are based on the component of total returns derived from contracted income; appreciation-driven returns are based on the component of total returns attributable to increases in valuation over time. All scores are in the context of the alternatives shown in the table.
Sizing matters
Historical evidence shows that portfolios with larger allocations to alternatives consistently achieve better risk-adjusted returns. This is because alternatives bring attributes such as diversification, alpha generation and illiquidity premiums that require meaningful allocations to fully realise their impact.
Institutional investors have long recognised this. Yale University’s endowment, for example, has consistently allocated more than 60% of its portfolio to alternatives, outperforming a traditional 60/40 stock-bond portfolio by more than three percentage points per annum over the past 20 years.
Broader is better
While sizing matters, breadth is equally important. Alternatives respond to distinct economic drivers, meaning that diversifying across strategies – such as private equity, private credit, infrastructure and real estate – can provide uncorrelated returns, reduce concentration risks and enhance portfolio resilience across market cycles.
Recent market performance illustrates this vividly. In 2022, surging inflation and sharp interest rate hikes led to significant sell-offs across risk assets such as public and private equity. However, these same factors were beneficial for the transport and infrastructure sectors, with the transport sector benefiting from a surge in shipping costs driven by geopolitical disruptions and strong pent-up demand.
By 2023, higher borrowing costs put significant pressure on commercial real estate values, yet those same interest rate increases contributed to robust returns in direct lending.
Alternative asset class returns
Sources: Burgiss, Cliffwater, MSCI, FactSet, J.P. Morgan Asset Management; data as of 30 Nov 2024.
This divergence in outcomes highlights the power of breadth. By allocating to alternative asset classes with different return drivers, investors can mitigate sector-specific risks, smooth volatility and build portfolios that perform more consistently, no matter the economic cycle. Moreover, active management can further enhance these benefits by effectively capturing return dispersions, leading to more consistent positive outcomes.
Balancing risks and rewards
While alternatives offer compelling benefits, they do come with trade-offs that must be carefully managed. Two critical considerations are balancing portfolio size with liquidity needs and managing systematic versus idiosyncratic risks.
Larger allocations to alternatives can unlock their benefits at the portfolio level. However, many alternative investments require long-term commitments, reducing access to capital for short-term needs or unexpected market conditions. Striking the right balance will depend on specific liquidity needs but still needs to be considered.
When it comes to managing systematic versus idiosyncratic risks, public market funds offer exposure to the former because they typically provide broad diversification across sectors and regions, reducing reliance on any single investment.
In contrast, private equity and riskier private real estate or private credit strategies often involve concentrated exposures to specific sectors, geographies or companies. This increases idiosyncratic risk, where the performance of individual investments or managers can significantly affect returns.
This results in much wider return dispersion between top and bottom performing managers than in public markets. Broader diversification across alternative asset classes can mitigate some of this risk, but thoughtful manager selection and diversified portfolio construction are essential to achieving consistent outcomes.
Manager dispersion in different asset classes
Source: Burgiss, NCREIF, Morningstar, PivotalPath, J.P. Morgan Asset Management. Manager dispersion is based on annual returns over a 10-year period ending 3Q 2024 for hedge funds, US core real estate, global large-cap equities and global bonds. US non-core real estate, global private equity and global venture capital are represented by the 10-year internal rate of return (IRR) ending 2Q 2024. Data are based on availability as of 30 Nov, 2024.
By carefully balancing these trade-offs – allocating thoughtfully to alternatives, sizing correctly to reap the benefits while maintaining liquidity, and diversifying across asset classes and strategies – investors can manage the risks while harnessing the full benefits of alternative investing.
Aaron Hussein is a global market strategist at J.P. Morgan Asset Management. The views expressed above should not be taken as investment advice.
Trustnet looks at multi-asset funds that had their three-year anniversaries last year.
Investors who backed a newly launched multi-asset fund in 2021 had a good chance of picking up an outperformer, according to data from FE Analytics.
Of the 28 funds launched in the IA Flexible Investment, IA Mixed Investment 40-85% Shares, IA Mixed Investment 20-60% Shares and IA Mixed Investment 0-35% Shares sectors that year, some 16 beat their average peer, while 12 underperformed.
Investors often wait for a fund to pass through its three-year anniversary to measure its performance but getting in early can lead to greater returns, as evidenced in this study.
Trustnet looked at multi-asset funds launched in 2021, which passed through their three-year track record last year. We compared the performance in sterling terms over three years to the end of 2024, to give each fund an even footing.
The top performer over this time was the Vanguard ActiveLife Climate Aware 80-90% Equity fund, which made 21.3%, the fourth-best return in the IA Flexible sector.
Funds in this sector tend to perform better as there is no restriction on how much they can hold in equities. This fund self imposes a limit of between 80% and 90%.
It was not alone in the sector, with VT PortfolioMetrix GBP Allocation Assertive and MGTS Tempus Enterprise Portfolio also registering top-quartile returns, while CT Managed Equity, Margetts BLENHEIM Overseas Equity and MGTS IDAD Refined Growth sat in the second quartile over three years.
Source: FE Analytics
In the IA Mixed Investment 40-85% Shares sector, HL Growth came out on top, with a 14.5% gain. Managed by Ziad Gergi, it invests in passive funds predominantly from Legal & General, with L&G Future World ESG Developed Index Fund making up more than a third of the portfolio. The fund was one of a handful of names given an FE fundinfo Crown Rating of five at its first attempt.
It was followed by Waverton Multi-Asset Growth, which also made a top-quartile return in the sector during its first three years. Run by James Mee, the portfolio invests in individual equities but predominantly uses Waverton’s in-house funds for its fixed income exposure.
In the IA Mixed Investment 20-60% Shares sector, VT PortfolioMetrix GBP Allocation Balanced came out top among these young funds, with a return of 8.8%. Managed by Alex Funk, Phil Wellington and Oliver Jones, the fund is entirely invested in passive funds.
It was joined in the top quartile of the peer group by Vanguard ActiveLife Climate Aware 40-50% Equity, the less equity-heavy cousin of the Vanguard ActiveLife Climate Aware 80-90% Equity fund mentioned above.
There were no top-quartile funds from the IA Mixed Investment 0-35% Shares sector. Despite making a 0.4% loss, IFSL Marlborough Conservative’s performance was enough to place it in the second quartile of the most cautious sector.
Run by Nathan Sweeney, the portfolio is a blend of both active and passive strategies. Its top five holdings are all in passive bond funds, while the highest weighted active fund is M&G Emerging Market Bond, which is the sixth largest position in IFSL Marlborough Conservative.
Not all funds launched in 2021 were an immediate success, however. MGTS IDAD Future Wealth was the worst performer, losing 7% over the three years to the end of 2024, the second-worst return in the IA Flexible Investment peer group during this time. However, its more recent returns have been stronger, with the fund up 17% over the past 12 months.
Source: FE Analytics
CT Managed Bond Focused was the worst performer among those in the IA Mixed Investment 0-35% Shares sector, down 4.1%. Run by Alex Lyle, the portfolio is currently 30% invested in equities with the remainder in fixed income. It is a fettered fund-of-funds, meaning it invests solely in Columbia Threadneedle’s in-house funds.
In the IA Mixed Investment 40-85% Shares and IA Mixed Investment 20-60% Shares peer groups, the worst funds both came from EdenTree, with the Responsible and Sustainable Multi-Asset Balanced and Responsible and Sustainable Multi-Asset Cautious funds both making fourth-quartile losses of around 4%.
Managed by Chris Hiorns, both funds struggled mightily in 2022, registering losses of 14.1% and 12.7%, respectively. Things were better in 2023, when they both sat in the second quartile of their respective sectors, but fell to the bottom 25% again in 2024.
Run with a sustainable mindset, the funds invest in direct equities predominantly in the UK and are underweight the US, with just 11.9% exposure to the country. This may have impacted returns in recent years, as a small band of US stocks known as the Magnificent Seven have continued to dominate the global equity landscape.
Infrastructure trusts offer inflation protection and high dividends, while continuation votes could provide a catalyst for shareholder-friendly action.
Infrastructure investment trusts are emerging from a tough couple of years but there are many reasons to take a closer look at the beaten-up sector, from high dividends at a time when interest rates are coming down, to inflation protection and government-backed cashflows.
The IT infrastructure sector’s average dividend yield was 6.2% as of 31 December 2024, according to the Association of Investment Companies (AIC), while wide discounts (a sector average of -20.4%) offer new investors an attractive entry point and serve as a catalyst for boards to take action.
Markuz Jaffe, an analyst at Peel Hunt, said companies are employing a range of approaches to address persistent discounts, “often featuring capital allocation and comprising one or more of share buybacks, asset disposals, reducing leverage, upgraded dividend guidance or a revamped investment strategy”.
Discounts have also, in some cases, triggered continuation votes. Peel Hunt expects 11 infrastructure investment companies to hold a continuation or discontinuation vote over the next two years, representing more than half of the sector (excluding trusts that have proposed or initiated a wind-up). These include six trusts with discount-triggered mechanisms, four calendar-driven votes and one size-driven vote.
Jaffe expects these to spur boards into action ahead of time. “It's not so much the vote that usually causes the fireworks. It's what the boards do in advance of the vote that tends to be the marker in the sand, at which point the board or the manager or both realise they need to make sure investors are on side,” he said.
Hassan Raza, a portfolio manager at Capital Gearing Trust, agreed. “With the trust sector on high alert due to activist investors and several continuation votes on the horizon this year, boards will be under significant pressure to deliver strategic solutions that unlock shareholder value,” he said.
The infrastructure trust sector is also undergoing a wave of consolidation through wind-ups, mergers and acquisitions (M&A).
British Columbia Investment Management Corporation’s (BCI) has just bid for BBGI Infrastructure, which has a market value of £871m. And in November 2024, Atrato Onsite Energy’ commercial and residential rooftop solar portfolio was acquired by Brookfield Asset Management and Real Asset Investment Management in a £220m deal.
Meanwhile, several listed infrastructure strategies have initiated wind-ups in the past two years, especially at the smaller end of the market-cap spectrum.
Infrastructure trusts that entered into or proposed a wind-up between Jan 2023 and Oct 2024
Sources: Peel Hunt, company data
Some wealth managers and asset allocators are taking advantage of these catalysts to move back in. Capital Gearing Trust recently increased its exposure to infrastructure assets, Raza said.
“Core infrastructure is particularly attractive on a risk-adjusted basis but, at these discounts, some solar funds are priced as if the sun won’t rise tomorrow. The market appears dislocated, requiring both consolidation and the return of capital,” he explained.
Jason Borbora-Sheen, co-portfolio manager of Ninety One’s multi-asset income strategies, sold out of infrastructure trusts in 2021 but has been building up his exposure since the end of 2023, although he remains “very cautiously sized”. He holds HICL Infrastructure, International Public Partnership, 3i Infrastructure and BBGI Global Infrastructure.
Infrastructure trusts are a “riches to rags” story having been the “darlings” of the wealth management industry between 2008 and 2019, Borbora-Sheen said. Wealth managers used infrastructure to generate income when interest rates were low but as rates rose they gravitated towards bonds instead. Selling pressure, an increase in discount rates and the macroeconomic backdrop led to a derating.
Going forward, he does not expect these trusts to rerate unless gilt yields crash but their dividend yields are so high that investors are being paid to wait. “You won’t make massive capital gains,” he pointed out, but these trusts serve as a valid alternative to bonds because they provide inflation-linked, government-backed cash flows.
He expects inflation to be more volatile over the next 10-15 years than in the recent past, which would impact the correlation between bonds and equities, making assets with an element of inflation linkage more attractive.
Robert Fullerton, a senior research analyst at Hawksmoor Investment Management, agreed. Infrastructure debt pays higher yields than corporate bonds, both in terms of the dividend yield and the underlying portfolio yield, at a time when credit spreads are tight, he said.
However, Matt Ennion, head of investment fund research at Quilter Cheviot, said large discounts are a challenge. Core infrastructure trusts used to have too much debt but they have been selling assets to pay that down and buy back shares. “I just think they need to be a bit more aggressive at this stage because [discounts have] drifted on for a long time,” he said.
Once discounts come in, he believes trusts should recycle capital into higher returning investments such as construction.
The story is similar for renewable energy trusts but they still have a lot of debt and are not doing enough buybacks, Ennion said. He also thinks there are too many small trusts and consolidation is inevitable. “There’s a buyers’ strike at the moment and if there’s no demand, you’ve got to reduce the supply,” he said.
His two outstanding infrastructure trusts are 3i Infrastructure and Pantheon Infrastructure. They both have good track records, strong performance and high-quality assets.
Performance of trusts vs sector over 3yrs
Source: FE Analytics
They pursue a private equity style strategy: buying assets or companies and improving their value before selling them on five to seven years later. Even so, their discounts are wide, which offers value to new investors, he noted.
The cost of not tackling ballooning budget deficits that are typically associated with wars and recessions is steadily increasing.
The aftermath of historic fiscal stimulus following the Covid-19 pandemic, elevated global inflation, and the most recent US election during which President Trump campaigned on further fiscal easing have put elevated US government debt levels increasingly in focus.
Since president Trump's election victory odds troughed in early September last year, term premia in the US have risen by roughly 80 basis points (bps). While this increase has been partly driven by more accommodative monetary policy, it also reflects the bond market's assessment of the future fiscal trajectory post-election.
Swelling US federal debt is well understood by market participants
The bipartisan Congressional Budget Office currently projects US federal budget deficits will reach 6.1% of GDP by 2035 and US debt held by the public will rise to 118.5% of GDP, representing the second-highest debt burden since 1790.
On the expenditure side, the main culprit behind higher outlays is mandatory spending, including programs such as Social Security, Medicare, and Medicaid, which will further increase given demographic shifts in the US over the coming decade.
Discretionary spending, both defence and non-defence, stands at the second-lowest share of the economy going back to World War II and is projected to decline over the coming decade.
Interest costs are now an increasingly important share of total spending, accounting for 3.1% of GDP — the highest percentage going back to at least 1965.
At the same time, total revenues are projected to be roughly stable over the coming decade — even allowing for the potential revenue raised by increasing trade tariffs — and in line with average revenues going back to the early 1960s.
Importantly, these projections do not account for a possible recession over the next decade — which would cause debt dynamics to deteriorate further — and assume all current policies will expire on schedule, including the Tax Cuts and Jobs Act (TCJA) of 2017.
Given full Republican control across the presidency, Senate, and House, the TCJA will likely be extended, with a projected cost of $5.3trn over the next decade.
Positive and negative implications for high debt levels
On the positive side, persistent government deficits following the global financial crisis and Covid-19 allowed those in the private sector to repair their balance sheets and household debt as a share of GDP has declined to the lowest level since 2000. Non-financial corporates are also in better health, with debt levels at the lowest in a decade.
In aggregate, higher public sector debt has helped to ease the debt burden of the private sector, making the aggregate economy more robust and less sensitive to sharp rises in interest rates, as demonstrated in 2022.
On the negative side, there is already evidence that increased spending on entitlements and interest costs is crowding out other forms of federal government investment that historically have served as a tailwind for economy-wide productivity gains.
The US has a long history of implicit and explicit public/private partnerships that occur when government investment increases, including in wind power, supercomputing, and the internet.
With accelerating capital expenditures devoted to generative artificial intelligence (AI), in addition to the elevated level of private sector intellectual property and research and development (R&D) spending, there are clearly positive signs for sustained productivity growth in the US.
However, like many new and potentially transformative technologies, widespread adoption often requires increased government investment around issues such as skills retraining before economy-wide adoption. A rising government debt burden risks crowding out government investment at a time when it is most necessary.
That said, the US still has important advantages over other countries with similar debt profiles, such as:
1) The US dollar’s global reserve currency status
At nearly 70%, international currency usage of the US dollar has increased relative to 20 years ago, based on various factors. This ‘exorbitant privilege’ has helped keep interest costs and debt levels lower than would be the case if the dollar was not the preeminent reserve currency.
2) The Federal Reserve’s balance sheet
An increasingly important tool for monetary policy and the banking sector, the Fed balance sheet currently holds $4.3trn in US Treasury securities. This persistent source of demand is an important factor suppressing bond yields. My own analysis suggests that, since 2009, Fed purchases have kept long-end yields roughly 100 – 150 bps below where they should be given fundamentals.
3) Many of these issues are solvable
The solution revolves around increasing revenues and/or modifying the trajectory of entitlement spending through means testing and/or increasing the eligibility age.
Solutions to set the US on a more sustainable fiscal trajectory have been presented by the Simpson-Bowles Commission and the Penn Wharton Budget Model team. The newly created Department of Government Efficiency (DOGE) also has a wide scope to analyse government debt and efficiencies and make recommendations.
Solutions are there but they require political will
The cost of not tackling ballooning budget deficits that are typically associated with wars and recessions is steadily increasing, with inflation still well above the Fed’s 2% target and term premia in the bond market starting to rise again.
The bond market will be acutely attentive to fiscal developments, and should medium-term reforms not get implemented over the next 12 – 24 months, then it will likely flex its muscles and potentially force painful action.
Michael Medeiros is a macro strategist at Wellington Management. The views expressed above should not be taken as investment advice.
HarbourVest Global Private Equity is implementing a range of measures to narrow its discount.
HarbourVest Global Private Equity is taking decisive action to narrow its discount with three new initiatives but will they work and should investors take the plunge now?
The first part of its three-pronged approach concerns share buybacks. A year ago, the board made a pool of money available from asset sales to return to shareholders through buybacks and special dividends. Last week, the trust said it would increase the amount saved into this pot from 15% of proceeds from asset sales to 30%.
This could make as much as $235m available for share buybacks, based on the trust selling 16% of its portfolio this year and money already in the distribution pool.
This strategy is already working. Last year the trust repurchased $90m of its shares, which contributed to a 12.5% uplift in its share price.
Second, the trust is simplifying its investment structure by setting up a separately managed account to deploy capital directly into third-party funds, secondary opportunities and co-investments, thereby removing the fund-of-funds layer.
Anthony Leatham, head of investment trust research at Peel Hunt, said the separately managed account should give HarbourVest more control over portfolio liquidity and reduce leverage.
Finally, a continuation vote will be put to shareholders at the trust’s annual general meeting in July 2026.
Leatham said this will make HarbourVest the only private equity fund-of-funds and one of the few investment trusts to offer shareholders a continuation vote. “It’s a line in the sand. It says: ‘we don’t mind being judged’,” he noted.
What impact will these changes have?
Matt Ennion, head of investment fund research at Quilter Cheviot Investment Management, said the changes are a “bold step” and have “resonated well with shareholders”, judging by the leap in the trust’s share price since they were announced on 30 January. “Hopefully other boards are watching,” he added.
Performance of trust’s share price over 1 month
Source: FE Analytics
The day after the change were announced, the trust’s discount narrowed from about 40% to 36%, according to Deutsche Numis.
The trust has recovered significantly from the nadir of March 2023 when it was trading at a 53% discount but the current difference between its share price and net asset value (NAV) is still wider than the private equity fund-of-fund peer group average of 33%, Peel Hunt stated.
Leatham expects the discount to come in further, “particularly in an environment of increased realisations and distributions and an improvement in risk sentiment towards private equity strategies”.
“The new initiatives also reveal a simplified and more flexible investment approach and improved corporate governance standards,” he added. Peel Hunt had an outperform rating on HarbourVest before the recent announcement and is maintaining it.
Peter Walls, who manages Unicorn Mastertrust, said buying back and cancelling shares should provide an immediate uplift to the trust’s NAV.
Walls thinks this is a good time to invest in the trust and said the board is serious about tackling the discount, although he believes HarbourVest should be a long-term, buy-and-hold investment.
A lot of HarbourVest’s underlying assets are based in the US, where president Donald Trump is adopting business friendly policies and where interests rates are gradually coming down, creating a supportive backdrop, he explained. The market for initial public offerings (IPOs) has been “moribund” for the past couple of years but is expected to recover, especially in the US, he continued. The secondary market is also quite active and provides an exit strategy.
However, Walls was surprised by the introduction of a continuation vote and he hopes the trust will not become a “hostage to fortune”.
What is the long-term investment case for HarbourVest?
Ennion said HarbourVest is the only one-stop-shop, diversified fund-of-funds left in the IT Private Equity sector, given that other trusts, such as Pantheon International and Patria Private Equity, have been moving towards more direct investments, co-investments and secondaries. That is also the direction HarbourVest will be moving towards over the next five to 10 years with its new separately management account, he added.
HarbourVest provides access to the best managers in an asset class where the performance of the top quartile is meaningfully different from the average and where the best managers tend to outperform consistently, he continued.
Unicorn Mastertrust has held HarbourVest for almost a decade and Walls is pleased with performance during that time, even despite the past two or three difficult years during which the discount has widened.
Performance of trust vs sector and benchmark over 10 yrs
Source: FE Analytics
Trust’s share price vs NAV over 10 yrs
Source: FE Analytics
Are any other private equity trusts worth considering?
HgCapital* is the “stand out” private equity trust and a top performer, Ennion said. Reflecting this, it trades close to NAV and has been able to sell assets throughout the cycle. HgCapital is the second-best performing trust in the IT Private Equity sector behind 3i Group over one, five and 10 years to 5 February 2025 and the fourth-best over three years.
Ennion also likes Pantheon International for its broad, diversified portfolio overseen by an impressive manager.
Walls owns ICG Enterprise, Patria Private Equity, Oakley Capital Investment and CT Private Equity. He said he invests in private equity because, over the long term, there is plenty of evidence that it outperforms public markets and “if you want to perform differently from the markets, you’ve got to invest differently from other investors”.
*HgCapital is an investor in FE fundinfo, Trustnet's parent company.
Interest rates fall by another 0.25 percentage points.
The Bank of England’s Monetary Policy Committee (MPC) has slashed interest rates to 4.5%, the lowest level since June 2023.
The MPC said this was because of “substantial progress” on inflation over the past two years, as external shocks have reduced, and long-term inflation expectations have stabilised.
Zara Nokes, global market analyst at JP Morgan Asset Management, said: “With December’s softer-than-expected inflation print having fuelled market expectations for a cut, the Bank of England likely felt it had no other choice today. The distribution of votes showed high conviction in the call, yet this approach is not without risks.”
The MPC explained that inflation is still “following a bumpy path”. It predicted that headline CPI inflation could rise this year to 3.7%, due to higher energy costs and regulated price changes.
Additionally, uncertainties around supply and demand dynamics remained crucial. It said that longer-lasting weakness in demand relative to supply could warrant a less restrictive Bank rate, while constrained supply could lead to a tighter monetary policy.
The MPC said: “Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.”
Three out of six strategies that have slipped this year are run by Fidelity.
Six funds in the IA Asia Pacific Excluding Japan sector with strong long-term performance are going through a rough patch right now and three of them are managed by Fidelity International.
Fidelity Asian Dividend, Asia Pacific Opportunities and Asian Smaller Companies have gone from being first-quartile within their sector over a 10-year period to bottom quartile over the past 12 months.
In this series, Trustnet is looking at long-term outperformers that are currently having a hard time and vice versa, the funds that have emerged over the past 12 months after a decade of hardship.
At £1.4bn, the largest in the list by assets under management (AUM) is Fidelity Asia Pacific Opportunities, run by FE fundinfo Alpha Manager Anthony Srom. It was the top fund by returns in its sector over the past 10 years, returning 185.4% against the 89.6% of the average peer. Yet it couldn’t keep up with its own success over the shorter term, sinking to 96th position out of 117 funds over one year and trailing the competition by almost three percentage points.
Researchers at RSMR still back the fund, which they deemed “suited as a satellite holding, unless investors are willing to exercise a degree of patience”, and admired the manager’s ability to avoid ‘overheated’ areas of the market.
Performance of funds against sector over 1yr
Source: FE Analytics
The second-largest of the three funds is Fidelity Asian Smaller Companies, led by Alpha Manager Nitin Bajaj, who follows a fundamentals-driven, bottom-up approach.
Like many managers in this list, his style is tilted towards value. Having remained in the first quartile of performance over 10, five and three years, the fund has been struggling at the bottom of the fourth quartile this past year, with a 5.9% return against the sector’s average of 14.8%.
Finally, Asian Dividend, managed by Jochen Breuer, has a small portfolio of £73m, invested in a concentrated number of dividend-paying mid- to large-caps and some small-caps. It has a historic yield of 3.6%.
A spokesperson at Fidelity International attributed the difficulties of these funds to top-down macro factors, such as weak Chinese consumption, tech demand driven by artificial intelligence, evolving shareholder initiatives and government policy, which significantly influenced Asian equity markets last year.
“2024 was driven by a narrow market leadership, particularly among large-cap stocks, and strong momentum in markets like India, Japan, and Taiwan. Our performance is strongest when corporate fundamental factors drive markets,” they said.
“While it may face headwinds in narrow markets, our focus on fundamental research and robust portfolio construction positions us for future success. These periods often provide mispriced opportunities that long-term fundamental investors can capitalise on when markets normalise.”
The Asian market remains one of Fidelity’s strengths, as fund pickers told Trustnet, with a suite of vehicles that have generally performed well, thanks to strong resources in the region.
Concluding the list of short-term tailgaters are Janus Henderson Inst Asia Pacific ex-Japan Index Opportunities, Quilter Investors Asia Pacific (ex Japan) Equity and Matthews Asia Discovery.
Long-term outperformers struggling in the short-term
Source: Trustnet
Leaving value and special situations funds behind, six long-term underperformers that follow a momentum or growth-driven approach seem to be turning a corner.
With the Asian market staging a recovering over more recent timeframes, two passive exchange-traded funds (ETF) in particular have captured the most of this upside, iShares MSCI AC Far East ex Japan UCITS ETF and HSBC MSCI AC Far East ex Japan UCITS ETF.
Among the actively managed cohort, Invesco Asia Consumer Demand stood out for having achieved the highest return over the year among the funds in this study (17.2%). Managers William Yuen, Shekhar Sambhshivan and Mike Shiao invest in companies that they think will benefit from growth in domestic consumption in Asian economies.
Judging by its AUM, the Templeton Asian Growth fund is the most popular of the six vehicles on the mend, with £1.7bn in its portfolio. Managed by Sukumar Rajah and Eric Mok, its top-10 holdings include recognisable names such as Taiwan Semiconductor Manufacturing Company, Tencent, Alibaba and Samsung.
Long-term underperformers recovering in the short-term
Source: Trustnet
One small-cap fund has made the list too: abrdn SICAV I Asian Smaller Companies. It has returned 15.8% in the past year, in line with the sector and well above its benchmark, the MSCI AC Asia Pacific ex Japan Small Cap index (4.9%).
Mirabaud Equities Asia ex Japan completed the list.
This article is the second instalment of a series and follows a review of the IA UK All Companies sector.–
The takeover bid values the trust at a 3.4% premium to its December share price.
British Columbia Investment Management Corporation (BCI), a Canadian institutional investor, is acquiring the BBGI Global Infrastructure trust.
The offer price of 147.5 pence per share corresponds to a 21% premium on yesterday’s closing price and a 3.4% premium to the estimated net asset value (NAV) of 142.7 pence per share as at 31 December 2024.
Advised by Jefferies Financial Group, the BBGI board considers the terms to be “fair and reasonable” and unanimously recommends shareholders vote in favour of the resolutions at the next general meeting, which will be announced within 28 days.
This deal is in the best interests of shareholders as a whole, according to the board and to BBGI chief executive officer Duncan Ball.
“Although both the supervisory board and the management board are confident that BBGI can continue to deliver sustainable cash flows to shareholders, the offer from BCI represents a premium to the undisturbed share price and to net asset value,” he said. “It also provides shareholders with the opportunity to realise the value of their holdings in cash at an attractive value in excess of the reasonable medium term prospects for BBGI on a standalone basis.”
BBGI is known for its “super-core” infrastructure exposure and has been recommended by experts multiple times on Trustnet.
BCI manages a portfolio of public and private market investments on behalf of the British Columbia public pension fund and other institutional clients, and has CAD250bn in assets under management.
Trustnet identifies the top IA Global funds that went against the grain over the past five years.
The US equity market was the place to be for investors in recent years. The S&P 500 has significantly outperformed all other regions over the past decade and the US now represents 66.6% of the MSCI ACWI index.
As Rob Morgan, chief analyst at Charles Stanley Direct, said: “Simply being market weight or overweight in the US has been the ticket to good performance.”
However, while the US may have been a favourite destination for investors, especially in the past five years, some global strategies were able to thrive while going against the consensus. Of the 414 IA Global funds with a five-year track record, six delivered top-quartile performance with less than a 50% allocation towards America, according to their most recent factsheets.
Source: FE Analytics
Jason Hollands, managing director at Bestinvest, explained: “This is an eclectic group of funds, reflecting that over the past five years, you’d need to have been doing something very much off the beaten track to beat the MSCI All Country World Index.”
Value funds
Of the six qualifying funds, three (Ranmore Global Equity, Heptagon Kopernik Global All Cap and MFS Meridian Contrarian Value) were value funds.
This might be a surprise, as the difference between value and growth stocks is now more extreme than the height of the dot.com bubble, which has left value investing out of favour. Despite this, the strategies posted first-quartile returns of 102%, 105.1% and 88.3%, respectively.
Performance of funds vs sector and MSCI ACWI over 5yrs
Source: FE Analytics
As a result of their value investment style, Hollands explained that they “had no resemblance to the index”. Indeed, of the six funds, these three had the lowest allocation to the US.
However, while these funds have performed well recently, Hollands explained that they were an inconsistent option and have experienced large deviations in results. This is demonstrated by the fact they ranked in the third or bottom quartile for volatility in this period.
Nevertheless, Morgan said these value funds made great diversifiers in investors’ portfolios. For example, he explained that the Ranmore fund had delivered good returns for investors by targeting “less fashionable” areas of the market. For example, the fund has a 40% allocation towards Consumer Products, while Consumer Discretionary and Staples represent a combined 17% of the MSCI ACWI.
L&G Battery Value Chain UCITS ETF
Not all the funds that beat the market were value strategies. For example, Morgan drew attention to the L&G Battery Value Chain UCITS exchange-traded fund (ETF), which tracks a basket of battery technology and energy storage stocks. While he conceded this was a niche, high-risk approach, he argued it has performed “exceptionally well”. For example, it was up by 87.9% over the past five years.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
It has broad geographical exposure to both Japan and Europe, making it an interesting potential diversifier, he said. However, the fund has slid in recent years, with bottom-quartile results over the past one and three years.
Hollands was more critical of the fund, drawing attention to its niche offering and investible universe. “I do not see such narrow strategies as suitable for most retail investors,” he explained.
Schroder Global Sustainable Growth
Instead, Hollands pointed to Schroder Global Sustainable Growth, led by FE fundinfo Alpha Manager Charles Somers and his co-manager Scott MacLennan. Over the past five years, it was up by 84%.
Performance of fund vs sector and MSCI ACWI over 5yrs
Source: FE Analytics
“It underperformed last year, in common with most global equity funds, but otherwise, it has consistently delivered index-beating returns,” Hollands explained.
For Morgan, this was due to “exposure to the renowned Magnificent Seven” (Nvidia, Microsoft, Apple, Meta, Amazon, Alphabet and Tesla) and a large growth capital tailwind.
Indeed, Microsoft and Alphabet are the fund’s two largest holdings. Taiwan Semiconductor Manufacturing Company (TSMC), which has benefitted from recent investor fixation with artificial intelligence, is another prominent holding in the portfolio.
Pictet Premium Brands
Finally, we have Pictet Premium Brands. Over five years, it surged by 84.4%, beating the index by more than 30 percentage points. Hollands explained that the fund has a “strong consumer discretionary narrative” and invests in well-known, high-end brands such as Mastercard and Ferrari.
Performance of fund vs sector and MSCI ACWI over 5yrs
Source: FE Analytics
However, Hollands warned that recent geopolitical events may cause a headwind. “Things could be about to get interesting in this space with a global trade war kicking off, which will test how resilient some of these luxury names are,” he said.
Evenlode Global Equity manager James Knoedler thinks investing in AI is like taking shots at a moving target.
Slow and steady investing might be better than risking it all on the latest fads. For Chris Elliott and James Knoedler, co-managers of the £443m IFSL Evenlode Global Equity fund, investing should be like following the rules on a golf course: “you want to stick on the fairway”, said Knoedler.
Instead of getting swept up in the excitement over megatrends like artificial intelligence (AI), Elliott and Knoedler argue that investors should prioritise companies with characteristics that can stand the test of time.
Good long-term investing, the team at Evenlode believes, should be about getting rich slowly. Knoedler said Evenlode would rather be “the broccoli of fund management” than failed sharp shooters. By contrast, investing in AI can be like “taking shots at a moving target”, he added.
For Evenlode, fundamentals and durability of earnings separate exceptional companies from those that are merely good. Quality companies should have characteristics that increase in value over time. For instance, with AirBnB, the ‘network’ effect means as more guests use the service and as more hosts add their properties, the entire offering becomes more valuable to all parties.
“At the heart of it, we want to identify something that gives you the assurance the good economics that you are getting today can persist out into the future,” Knoedler said. These characteristics should ensure that the best companies are insulated from the impact of market megatrends.
“We do not want to be sharpshooters. If you think about it, this is maybe a ‘broccoli’ approach to fund management. It is a bit of a snooze fest, but it is good for you,” Knoedler said.
For example, Elliott pointed to RELX Group as a stock that has “compounded its sales and earnings at a healthy rate in the teeth of headwinds which have stalled the broader index”.
Share price performance of RELX over the past year
Source: FE Analytics
He explained that as a multi-national company, its revenue is internationally broad. As a result, it can endure geopolitical conflicts and upheavals better than a more domestically exposed business.
Additionally, while it benefits from developments in AI, it is not dependent on it. Elliott said: “Whether the generative AI model is there or not will not change the fact that people must buy the Lexus Nexus product to operate a legal office.”
Other holdings, such as Mastercard, follow a similar philosophy. It may be a technology company, but it is so tightly bound to its end market that Knoedler argued it was indifferent to AI. “If it [AI] does not show up, it can still make money the old-fashioned way,” he said.
For Elliott, while this does mean Evenlode will never participate in the full upside of AI implementation, it will never have to stomach the complete downside either.
This was a trade-off Elliott and Knoedler were “content to make”, prioritising risk control rather than getting into investments that may not stand the test of time.
This philosophy made it challenging for Elliott and Knoedler to justify investing in the Magnificent Seven (Microsoft, Nvidia, Apple, Tesla, Alphabet, Amazon and Meta).
"Developments like DeepSeek and AI are exciting, aren't they? They have a seductive effect,” Knoedler said. However, they argued that in the current investment cycle, AI companies could rise and fall rapidly.
Knoedler explained that this made it extremely difficult to determine what companies had durable earnings, which made betting on AI-focused companies risky.
“With AI, we would be taking shots at a moving target,” Knoedler said.
For this reason, Elliott and Knoedler own just three of the Magnificent Seven: Microsoft, Alphabet and Amazon. While these companies are at the forefront of semiconductors and AI implementation, they are multi-faceted and can approach AI in different ways. Knoedler said that this made them the best amongst the Magnificent Seven.
Elliott is cautious about Nvidia and other semiconductor companies. It is a highly cyclical industry, prone to rapid “changing of the guard”, he said. As a result, to bet on AI, “you have to be prepared to sit there and say this time it is different, that this time there is not a cycle anymore”.
Finally, they remained concerned about Magnificent Seven valuations. Elliott explained that every company has its price and the costs of AI-dependent companies are high, with the current adoption cycle set to put them even higher. “There must be a valuation point where you are unwilling to own anything in that sector. That is where we are right now,” he concluded.
It is the seventh trust to reject Saba Capital’s proposals.
Shareholders of the European Smaller Companies trust have voted this afternoon against the requisition proposal advanced by US activist investor Saba Capital.
The trust will be able to continue operating under its current directors, who have collected 62% of shareholders’ votes. Excluding Saba’s own votes, the result was close to unanimous, with 99.5% of votes cast against Saba's plan to replace the board.
This is the sixth defeat for Saba and leaves hope for Edinburgh Worldwide, the last requisitioned trust having to sustain a vote at its general meeting on 14 February.
Emma Bird, head of investment trust research at Winterflood, was “pleasantly surprised”.
“Our initial view on this episode was that Saba could have won several of the votes purely based on low voter turnout. However, we have been pleasantly surprised by the strong turnout of these market participants,” she said.
“We generally view activism in the investment trust sector as positive, given that it can drive shareholder returns and improve corporate governance. However, the proposals put forward by Saba did not appear to be in the best interests of all shareholders.”
According to Bird, the key reasons why this US hedge fund failed to gain the support of other investors included the likelihood of a considerable change in strategy that was not desirable to current shareholders, a lack of clarity on the proposals and concerns around board independence.
James Williams, chairman of the European Smaller Companies trust, said: "Today's vote is a clear and complete rejection of Saba's proposals and a resounding endorsement of the trust’s proven investment strategy, the quality of its independent board and the manager's ability to deliver outperformance.”
Recent events should sound a warning note to investors to review their portfolios and put more value on value.
The shock waves were still reverberating around the markets from DeepSeek’s cheap artificial intelligence app when Trump dropped his tariffs bombshells.
DeepSeek challenges the dominance of the Silicon Valley giants. Tariffs are a geopolitical tool removed from economic orthodoxy. They erode the free trade infrastructure that underpinned globalisation and that acted as a deflationary force for many years.
All this means markets are facing a series of powerful and rapidly moving crosscurrents. (I am writing this while the US sleeps because that is my only way of being confident of reaching the end before things change, so feverish is the mood prompted by Trump’s return to the White House.)
The Nasdaq bounced quickly back to where it was before the DeepSeek strike, but Nvidia and other chip companies have not. Software has done better than hardware after a recent period of underperformance. Either way, a whole new debate has emerged more or less out of the blue sparked by low-cost Chinese piggybacking (something we have seen in so many sectors in recent decades).
We do not need to dissect whether DeepSeek is a genuine deflationary exogenous shock. And I have to be careful not to sound like I am seeing bubbles and calling an end to the market dominance of the Magnificent Seven and technology stocks in general. There is a saying that a bubble is something you don’t own that keeps going up in price. I don’t own any of the Magnificent Seven, which could make me sound very petulant!
I do not own them because I am an income investor with a strong focus on valuation. They are great companies but they do not pay high dividends and I think the stocks are expensive.
The importance of valuation
What I have found as a fund manager over the years is that the prism of income and value investing can open a world of opportunities for investors interested in building a broader base to their portfolio.
And the important word there is “world”. In the past two years, the North America exposure in our fund has fallen from half to a third. That compares to 66% of the MSCI All Countries World Index. Our fund trades on half the multiple of the market – and that is after topping its sector over one year and being top decile over three. It has an 8% free cash flow yield, which gives you a valuation cushion, one would hope.
Experience suggests that if there is a sell-off in markets, valuation usually helps. So where do I see the best opportunities for investors looking to mitigate the confusing array of risks we now face?
Where can you find value?
A quest for income stocks in under-appreciated areas has led us to be overweight Europe (29% of the portfolio) and Japan (10%). That’s where the dividend yields are high, often accompanied by share buybacks at decent valuations.
Europe is widely regarded as a basket case. We all know why. But European defence stocks have done well and still hold attractions in a more dangerous world. Consolidation is propping up valuations of European banks. Share buybacks and strong dividends mean banks are often returning a combined 30% or more of their market value to shareholders in just the next two years. In our top 10, we hold Germany’s Commerzbank, as well as the Italian bank BAMI; both have sought to rebuff bid interest from UniCredit of Italy. All you need in Europe is for the economy not to be quite as bad as people think for a bounce – as we saw in January.
Financials generally still look promising. We have an overweight to broad financials of 25% more than the MSCI index would guide a passive investor to own. After a good run, such a big sector exposure does present risks – especially if there is a recession or increased market volatility. Trump tariffs could be a catalyst for an unintended slowdown of the economy. That said, across the cycle, we believe interest rates will be higher for longer and inflation stickier than central banks would like to admit. Hence it is fundamentally a better environment for financials. That boosts lending margins at institutions which long ago repaired their balance sheets in response to the 2008 global financial crisis.
Having managed to make money when interest rates in their country were zero or negative, Japanese banks have rallied with the cost of borrowing this month hitting a 17-year high of just 0.5%, and the Bank of Japan signalling more hikes to come. Even so their shares are inexpensive, trading around 1x book value. Beyond the banks, Japan benefits generally from corporate reforms – and big Japanese companies are now buying back shares.
The world has just got more uncertain. I do not know if recent events will trigger a change in market leadership (but I do hope they will). Nor do I know what impact they will have on the global economy, but they should sound a warning note to investors to review their portfolios and put more value on value.
Jacob de Tusch-Lec is co-manager of Artemis Global Income and Artemis Monthly Distribution. The views expressed above should not be taken as investment advice.
There were some surprising funds on the most bought list, including four active names and an equally weighted passive portfolio.
Passive US funds dominated flows in 2024, according to data from FE Analytics, with iShares North American Equity Index taking in the most new money from investors over the course of the year.
The £15.5bn fund added some £3.1bn from performance last year as the FTSE North America index it tracks soared thanks to the continued rise of the Magnificent Seven.
Investors put in £1.5bn in new money last year on top of this, meaning assets under management (AUM) of the fund, which started the year at £10.8bn, rocketed.
It was joined by HSBC American Index and Fidelity Index US in second and third place respectively. The former was the only other fund in the IA North America sector to rake in more than £1bn of new money from investors, while the latter took in £750m.
Six of the 10 funds with more than £200m added in net inflows last year were passives including the fledgling L&G S&P 500 US Equal Weight Index fund, which went from £32m at the start of the year to £370m by year’s end despite making a loss overall.
The index gives each member of the S&P 500 an equal weighting, which means it is less dominated by the large-caps as some of its market capitalisation-weighted peers.
It was not a clean sweep for passive funds, however, with some active portfolios also making the list, as the table below shows.
Source: FE Analytics
The most-bought active fund was abrdn American Equity. Managed by Ralph Bassett, Qie Zhang, Virgilio Aquino and Mike Cronin, it aims to beat the S&P 500 index by 3% per year over rolling three-year periods. As such, at present it is heavily skewed to technology, which makes up around a third of the portfolio.
Software developer Microsoft, Google parent company Alphabet and online retailer Amazon are the three largest positions by some way in the fund, accounting for almost a quarter (23.6%) of the portfolio.
It took in £229m of new money last year, taking its assets under management from £113m to £415m after performance was also included.
MGTS AFH DA North American Equity, Premier Miton US Opportunities and BNY Mellon US Equity Income also made the list.
The latter two are both recommended by analysts at FE Investments. The Premier Miton fund is headed by Hugh Grieves and Alex Knox, who worked together at Gartmore, and gained FE Investments’ approval as a “solid option as an active US equity fund, providing exposure to the full spectrum of the US equity market, and particularly smaller- and medium-sized companies at different points in the cycle”.
Conversely, the BNY Mellon fund is run by John Bailer, who invests with a value tilt, something FE Investments said offered “important diversification away from the growth-oriented US market and average peer”.
“It is a clear positive that each stock position contributes meaningfully to income, rather than an approach combining some growth stocks with some of the highest yielding names, as the fund is therefore simultaneously a pure-play on the value style whilst avoiding businesses that are in structural decline,” it said.
Turning to the most-sold funds on the list, investors pulled £1bn from JPM US Equity Income last year despite the fund adding £399m to its AUM through performance.
CT American, Halifax North American, Baillie Gifford American and SJP North American were the other active names on the list, while investors also withdrew from passive options L&G US Index Trust and Vanguard US Equity Index.
In the IA North American Smaller Companies sector, no funds suffered net withdrawals of more than £100m, while there were two that raked in more than £100m.
Artemis US Smaller Companies took in the most with £245m of new money added to the fund, which is managed by Cormac Weldon and Olivia Micklem. Assets under management rose from £775m at the start of the year to £1.2bn by the end of 2024.
Analysts at Square Mile Investment Consulting & Research, gave the fund a ‘AA’ rating, stating Weldon is an “accomplished investor” with a “highly credible track record” throughout his career, most notably at Threadneedle Investments (now Columbia Threadneedle Investments).
They noted that the team is small, but said: “In this case we think its size is advantageous as it leads to swift decision making in a market that can be prone by short, sharp changes in investor sentiment.”
T. Rowe Price US Smaller Companies Equity was the other small-cap fund to garner interest from investors. With £123m in net inflows last year, the fund’s AUM rose from £220m to £368m.
Managers from Schroders and Rathbone identify the UK mid-caps with the potential to join the FTSE 100.
The gap between the FTSE 100 and FTSE 250 is smaller than investors may think. For example, the two markets performed similarly last year and the five best-performing companies of 2024 were actually FTSE 250 constituents.
FTSE indices are rebalanced quarterly, with mid-caps being promoted to the FTSE 100 throughout the year. One of the most recent examples of this was Games Workshop, the company behind the globally successful Warhammer franchise.
At these rebalances, companies are ranked by their market capitalisation. Any company already in the FTSE 100 that falls below the 111th position is automatically demoted, with the largest FTSE 250 company added to the large-cap index. Meanwhile, any stock that rises to the 90th position or above is automatically added, with the smallest FTSE 100 name dropping out (even if it is higher on the list than 111).
It can be a major boon for companies to be included in the FTSE 100, as passive funds tracking the larger index are forced to buy shares in the company. Additionally, their larger weighting in FTSE All-Share indices has a similar effect. Taking Games Workshop as an example, shares rose 21.4% in the two weeks leading up to the reshuffle on the back of strong results and potentially as investors began to price in its move.
But it is not easy. Duncan Green, manager of the Schroder UK Multi-Cap Income fund, said: “Earning a position in the FTSE 100 is no mean feat, requiring sustained shareholder value creation, robust cash flow generation, and strong returns on capital.”
Alexandra Jackson, manager of the Rathbone UK Opportunities fund, added this kind of stock movement was “ideal” as it means “the makeup of the FTSE 100 is being constantly refreshed”.
Below, Jackson and Green identified two mid-cap companies poised to become new cornerstones of the FTSE 100.
Softcat
Firstly, Jackson pointed to the tech infrastructure firm Softcat. The business's primary service is to resell Microsoft’s software to smaller companies on its behalf in exchange for incentives. The better this reselling process does, the better incentives Microsoft can offer, allowing Softcat to give better deals to its clients.
“Around we go in this lovely virtual circle, and it does not require much capital down from Softcat”, Jackson explained. Because Softcat is so capital-light, it has a strong balance sheet and a lot of free cash that it can distribute to shareholders.
However, Jackson explained it has not been plain sailing for the business. Last year, investors became overexcited by the prospect of artificial intelligence (AI), which led to a decline in its share price
“Shares probably got ahead of themselves and needed to take a little pause,” she said.
Share price performance over the past year
Source: FE Analytics
Nevertheless, she did not believe this "wrinkle" was enough to undermine Softcat’s range of qualities. She said it remained a “fantastic business” with “solid fundamentals” that positioned well for an eventual entry into the FTSE 100.
Green agreed with Jackson and credited Softcat for its customer-centric approach and “deep client relationships”. He argued this gave the firm a loyal customer base that has enabled it to grow its dividend and market share consistently.
He added it was well-positioned to play on megatrends and broader market developments, such as digital transformation and cybersecurity, which will add “IT complexity”. This in turn “fuels demand for Softcat’s expertise, ensuring businesses stay agile and secure”.
Cranswick
Next, Jackson pointed to food producer Cranswick. This is a favourite holding for Jackson and currently is the third-largest holding within the Rathbone UK Opportunities portfolio.
Cranswick is attractive in part because of its operational efficiency. She described it as a “true nose-to-tail” producer that used every part of the pig, including non-traditional cuts such as the liver and other organs.
She argued this efficiency enabled the business to grow substantially, increase capacity and significantly improve its allocation of capital. This growth has been reflected in its recent numbers, with the share price up by 43% in the past five years.
Share price performance over the past 5yrs
Source: FE Analytics
She added Cranswick was particularly notable because it was not a “super high margin business”, noting it tends to operate around a single-digit return. She concluded: “It is interesting that even a business like Cranswick will eventually be within a whisker of the FTSE 100”.
Green also favoured Cranswick. He described it as having grown from "modest beginnings" to become a major player in the pork, poultry and convenience food sectors.
The business has delivered enormous shareholder value over the long term, he said, and has grown its dividend relatively consistently over the past three decades through steady earnings growth.
Cranswick’s commitment to premium, sustainable products “aligns seamlessly with the modern consumer’s appetite for quality and environmental responsibility”, Green said.
Moreover, it partners with major UK retailers such as Tesco and Sainsbury’s on their high-end product ranges. Green explained that this made it an incredibly well-known business and gave it an edge over its rivals in a "fiercely competitive industry".
The latest Calastone Fund Flow Index reveals a pessimistic start to the new year.
Investors sold out of equity funds in January, according to the latest fund flow data from Calastone, with the UK being the most sold area despite the FTSE reaching a record high.
The Calastone Fund Flow Index revealed a net £640m was redeemed from equity funds over the course of January after a period of sustained inflows.
This means the month was the only one since late 2023 to see outflows, aside from October 2024 when net selling was driven entirely by investors crystallising profits ahead of the anticipated capital gains tax hike in October’s Budget.
UK-focused equity funds were hardest hit once again. Investors pulled £1.07bn out of these funds last month, which makes January the sixth worst month on record for UK equity funds.
Source: Calastone Fund Flow Index – Jan 2025
Net selling of £265m from European equity funds put January in the top 20 worst months for that fund sector. Meanwhile, funds investing in Asia-Pacific, Chinese and Japanese stocks had net outflows.
Edward Glyn, head of global markets at Calastone, said: “UK fund investors seem to have given the government’s fretful growth narrative a clear thumbs down. The UK stock market reached all-time highs in January, but investors merely took this as an opportunity to get out while the going was good.
“Meanwhile, political instability and increasing anxiety about the economy have put Europe back on the sell list after a strong 2024 for inflows driven by rising share prices.”
Some fund sectors captured net inflows. North American equity funds took in £576m during the month, while global equity funds also had a strong month.
Source: Calastone Fund Flow Index – Jan 2025
“Apparently nothing can dent the enthusiasm for US stocks,” Glyn added.
“Even the DeepSeek AI shock that happened late in the month spurred appetite rather than fear. The day after technology companies saw $1trn wiped off their market value, North American equity funds had their best day of the month with £167m of net inflows.”
Elsewhere, inflows into fixed income funds dropped by two thirds month-on-month to £267m, which was their weakest showing since investors took profits in September at the end of a long bond-market rally.
Government-bond funds suffered the biggest drop-off in interest, as inflows fell by almost nine-tenths to £41m. Net buying of corporate bond and high yield bond funds held up better.
“Bond markets had a terrible start to 2025 with yields on benchmark US treasuries and on UK gilts surging to their highest level since before the global financial crisis (bond prices fall when yields rise),” Glyn said.
“Investors bought into this market decline in the first half of the month – enabling new capital to lock into these ultra-high yields, before turning net sellers as calm returned. This is a pattern we often see in the millions of trades Calastone processes every month. Bond yields remain high, with the outbreak of an inflationary trade war potentially keeping them at elevated levels.”
Meanwhile, inflows to mixed asset funds dropped to £960m.
Trustnet’s research highlights how active UK funds have struggled in recent years.
Passive funds have outperformed their active peers on a wide range of closely watched risk and return measures over the past three years, Trustnet research has found.
In this study, we have scored IA UK All Companies funds on 10 key metrics: cumulative three-year returns to the end of 2024 as well as the individual returns of 2022, 2023 and 2024 (to ensure performance isn’t down to one standout year), three-year annualised volatility, alpha generation, Sharpe ratio, maximum drawdown and upside and downside capture, relative to the sector average.
To discover which funds were most consistently at the very top for the sector for different risk and return measures, we then worked out each fund’s average percentile ranking for the 10 metrics; the lower a fund’s average percentile score, the stronger across the board it has been over the past three years.
Performance of Invesco UK Enhanced Index vs sector and index over 3yrs to end of 2024
Source: FE Analytics
Invesco UK Enhanced Index (UK) took first place in this research, thanks to an average percentile ranking of 13.5 across the 10 metrics we examined. Its three-year return of 25.1% (shown above) is in the IA UK All Companies sector’s fifth percentile, while the £1.2bn fund was at the top of the sector for volatility, alpha, Sharpe ratio, maximum drawdown and downside capture.
As its name makes clear, the fund uses an ‘enhanced index’ approach that sits between pure index trackers and actively managed funds. It aims to offer index-like exposure while outperforming the benchmark over a market cycle.
Managed by Georg Elsäesser and Michael Rosentritt, the portfolio is managed with the belief that value stocks will outperform expensive ones over the long term, high-quality companies will beat low-quality and market trends – or momentum – can persist for some time.
The managers combine these value, quality and momentum factors into a portfolio of between 60 and 80 stocks. However, they avoid stock picking and instead look to largely match the beta of the index through a collection of cheaper stocks that can generate small incremental excess returns.
While Invesco UK Enhanced Index (UK) combines elements of index tracking and active management, the table below – which shows the 20 highest-scoring IA UK All Companies funds in this research – reveals how strong passive management has been in recent years.
Source: FE Analytics
Of the remaining 19 funds, 12 of them are pure index trackers with the majority following the FTSE 100 index. Their outperformance reflects the fact that mega-caps have led the market for some time now – the FTSE has made a 24% total return over the three years examined in this research, compared with a gain of just 2.1% from the FTSE Small Cap index and a 3.5% loss from the FTSE 250.
Investor sentiment in recent years has generally favoured blue-chip stocks, as the uncertain market backdrop means they have prioritised stronger balance sheets, more robust earnings and stable dividend yields.
In addition, the UK has been unloved by investors, which has caused small- and mid-caps, which are more geared to the health of the domestic economy, to suffer. The FTSE 100, in contrast, is more exposed to international revenues.
The highest-ranked active IA UK All Companies member in this research is Philip Wolstencroft’s Artemis SmartGARP UK Equity fund. It has an average percentile ranking of 17.1, aided by first-percentile numbers for three-year returns, alpha and Sharpe ratio.
Wolstencroft uses a ‘growth at a reasonable price’ (GARP) approach, which seeks out companies that are growing faster than the market while trading on lower valuations. SmartGARP refers to Artemis’ in-house software tool, which helps its managers identify companies with the most attractive financial characteristics by scoring them on eight investment factors including growth, value, investor sentiment and ownership, and environmental, social and governance credentials.
Artemis SmartGARP UK Equity’s tilt to value is a common factor among many of the other active funds coming out strongly in this research. Dimensional UK Value, JOHCM UK Dynamic, Jupiter UK Dynamic Equity, Invesco UK Opportunities and Man Undervalued Assets all take a value approach.
Source: FE Analytics
The funds with the highest average percentile ranking – i.e. the funds that have been towards the bottom of the IA UK All Companies sector for multiple metrics – tend to invest in small- or mid-cap stocks.
This should not be too much of a surprise, given the massive outperformance of UK large-caps during the three years under consideration. Nine of the 10 funds on the above table have a bias towards smaller or medium-sized business in their portfolios.
The exception is L&G Future World Sustainable UK Equity Focus, which has more than 80% of its portfolio in large-caps. Sustainable investing has struggled in recent years because of higher interest rates while the election of climate-sceptic Donald Trump as US president has hampered sentiment more recently.
Trustnet asks a financial planner when it makes sense to withdraw the money and when it doesn’t.
Many business owners will face the tough question of managing the money they have been earning through the company. Perhaps the worst decision is to leave it idle in a business account with low or no income paid but this is likely a common occurrence.
This money can be earmarked for various things, whether it be dividends, for reinvestment in a business or as rainy-day emergencies. But it can also be merely idle.
Below, Trustnet asked Lena Patel, independent financial advisor (IFA) and director of ISJ Financial Planning, when someone should consider moving the money and how they can do so tax efficiently.
To do this, we have used the example of an NHS doctor with a private practice, who has money sat idle in an account. However, the advice can apply to a range of people, including small business owners and single-person companies, such as freelancers and consultants.
When to withdraw and when not
Patel highlighted three main reasons why someone might want to withdraw funds from a corporate account, depending on their financial goals.
For example, mortgage holders might want to consider overpaying their debt, which is a particularly sensible solution if the mortgage rate is higher than the return on investments.
“In this case, it might make sense to use business funds to reduce debt,” she said. “However, mortgage overpayment could limit liquidity if you need funds in the short term.”
This has an opportunity cost: if the funds are invested within the business and are generating good returns, it may be better to leave them invested rather than withdrawing them and potentially losing out on that growth.
Another cause worth pursuing could be maximising a personal ISA. Each financial year, every UK citizen has a tax-free ISA allowance of £20,000. If that hasn’t been used up it may make sense to withdraw money from a private practice and contribute to a Stocks and Shares ISA to take advantage of the tax-free growth, the IFA said.
The last reason could be for extra income. “If you need additional income to cover personal expenses, withdrawing funds as salary or dividends may be necessary, especially if your business cash flow allows for it without jeopardising its operations,” she said.
“If your business is in a growth phase or experiencing cashflow challenges, keeping funds in the business is essential for ongoing operations.”
Things to consider also include tax penalties: if taking money out would trigger significant tax liabilities or affect one’s ability to reinvest in the business, it might be better to leave the funds where they are, according to the adviser.
So let’s now take a look at the four main ways to reclaim the funds and the potential price tags.
How to withdraw and tax implications
There are four primary options to free up the money, each with different tax implications. First is salary, one of the more expensive routes.
“If you’re a director or employee of your business, you can pay yourself a salary,” Patel explained. “This is subject to income tax and National Insurance contributions, but you may also be eligible for tax relief on pension contributions from your salary.”
If the business is a limited company with share participation, money can be paid out in the form of dividends, which are paid from profits after tax.
The first £1,000 of dividends is tax-free under the dividend allowance, but anything over that is taxed at different rates depending on total income. The rates are generally lower than income tax rates on a salary, making this a more tax-efficient way of cashing in.
Those who only temporarily need a part of the money could look into taking a loan from the business. This must be repaid, and if the loan balance is not cleared within nine months of the company's year-end, there could be tax implications, such as additional charges if the loan balance exceeds £10,000 at any point during the tax year.
Finally, sole traders or partners in the business can simply draw money from the account for personal use, with no tax bills to pay at the time of withdrawal. The amount doesn’t affect the taxman’s share directly, but there are levies due on the overall profits of the business, Patel explained.
In all cases, it's important to consider the short-term and long-term financial health of the business, as well as the personal tax situation. It is wise to seek financial advice to make sure decisions are made tax-efficiently and based on personal circumstances.
The two trusts published their meeting results this afternoon.
Saba Capital has hit another brick wall at the general meetings of the Henderson Opportunities and CQS Natural Resources Growth and Income trusts this afternoon.
In both cases, shareholders voted against the requisition proposals advanced by Saba, following in the footprints of the Herald Investment Trust and the two Baillie Gifford strategies, Baillie Gifford US Growth and Keystone Positive Change, which have already voted in recent weeks.
More than 59% of CQS shareholders who turned up today (the turnout was over 68%) cast their votes against Saba's resolutions in what QuotedData analysts called “a handsome defeat” for Saba.
“Now that Saba has been flatly rejected, the trust needs to be allowed to get back to the job of focusing on its portfolio and delivering value for shareholders,” they said.
“With the underlying asset class cyclically depressed but with the prospect of strong term growth in commodity prices, we think some shareholders who understand the trust will be taking the opportunity to add to their positions”.
The Henderson portfolio had comparable results, with a 73.4% turnout and 65.4% of votes against Saba. It is not completely out of the woods, however, as it now faces a reconstruction and voluntary winding up vote, with another meeting planned for 21 February. From then, the focus will be on implementing this scheme.
Although Saba still has sufficient votes to disrupt the company’s plans, it would be “nonsensical” to do so, according to James Carthew, head of investment company research at QuotedData.
“This is the second time Saba seems to have voted fewer shares than expected. I am starting to wonder if it had already started selling them before the meeting in expectation that it was going to lose,” he said.
“Given the consistent pattern of rejecting Saba’s proposals, it would perhaps be a better idea if it simply withdrew the remaining requisitions.”
Christopher Casey, chair of CQS Natural Resources Growth and Income, said: “The strong vote against Saba's proposals speaks loud and clear – the majority of our shareholders have shown the confidence in the existing Board and have voted to have them steer the company in the future.”
Wendy Colquhoun, chair of Henderson Opportunities, added: “The result today shows that shareholders do not want to be part of a Saba managed vehicle, but instead want to be able to retain full choice over what happens to their investment with more than 99% of non-Saba shareholders voting against the resolutions.”
There are two more meetings upcoming involving requisitions from Saba Capital. European Smaller Companies holds its meeting on 5 February, while Edinburgh Worldwide's in on 14 February.
Earlier this year we initiated a position in the streaming service.
In the year 2000, executives at the then mighty Blockbuster video company, were on the receiving end of a pitch from a loss-making start-up company, seeking $50m to fund their expansion in the nascent market for rental DVDs by post.
The pitch was made by the company’s co-founder Marc Randoph, and its name was Netflix. Blockbuster’s CEO famously “laughed (Marc) out of the room”, rejecting the business model as being “dot-com hysteria”. The rest, as they say, is history.
Having taken on the DVD rental market and won, Netflix’s ultimate success came from its strategic decision to move away from that market and into the nascent and competing world of streaming video content. A bold and visionary decision to sacrifice its core offering for an ultimately much bigger prize.
Netflix took advantage of faster and larger broadband and mobile connectivity capabilities to offer streaming content, in real time, direct into homes and mobile devices. Whilst YouTube gets the credit for being the pioneer in this technology, Netflix was the first to master taking studio-made content and distributing it to consumers for a monthly subscription fee.
Its early success was supported by exclusive content such as Breaking Bad and House of Cards, where word-of-mouth spread rapidly and provided incredible free viral marketing for the brand.
Initially the legacy Hollywood studios saw Netflix as just another means of distribution and they sold it their content on license. This quality content further fuelled Netflix’s success as it more rapidly acquired new subscribers and captured a greater share of viewing hours.
The established studios realised, too late, that they had allowed the fox into the hen house and before they could remove their content, Netflix had disrupted them and “stolen” their share of viewing hours. Equally importantly, Netflix had established a clear technological lead over its peers that persists to this day.
For its first decade of streaming success, Netflix funded its growth largely through debt. To grow subscribers it needed lots of content and it was willing to pay the highest price for the top talent in Hollywood.
Ryan Murphy left Fox to join Netflix in a $300m deal and Shonda Rhimes joined from ABC for $150m. Hollywood stars also signed big deals, Adam Sandler completed a four-movie contract for $275m and Barack and Michelle Obama and Prince Harry also signed big-ticket deals.
This investment in talent has been rewarded, especially as the rise of streaming TV has enabled global distribution to maximise ratings. In 2023 the series The Night Agent was viewed in total for a staggering 972 million hours by Netflix subscribers, or four hours by every single global subscribing household.
The top 100 series in 2023 were collectively viewed for 34.5 billion hours. These figures dwarf typical legacy domestic ratings. In a relatively short period of time, Netflix has become the undisputed champion of streaming TV content.
Today, Netflix has more than 280 million subscribers around the world, all paying a monthly subscription. In 2022 it reached a size and scale that resulted in accelerating incremental margin expansion that enabled the company to become self-funding and cash flow positive.
In 2023 Netflix’s free cash flow was $7bn and its net-debt to EBITDA ratio had fallen to 1.3x. This sets the company up very well for the next phase of growth to come, driven by the following opportunities:
Advertising
In late 2022 Netflix launched a subscription offering that included adverts that today has 70m subscribers worldwide. The low monthly cost is just $6.99 (or £4.99 in the UK), vs. the premium no-ads price at $22.99 a month and, of course, Netflix is now earning advertising revenues that covers the gap in the lower subscription fees.
The offer has reduced customer churn levels to an estimated 2%, by far a best-in-class level, making its business more defensive in the process.
Subscriber growth
Netflix surpassed expectations with its efforts to clamp down on password sharing. This boosted subscriber growth in its mature markets, but it is fair to say that growth in the US and Europe has now matured. However, Netflix is a global company with global content. Latin America and Asia-Pacific both have more than 45 million subscribers with both regions growing at a double-digit rate.
Pricing
Netflix’s most expensive price point is $22.99 a month whilst a typical cable TV package costs $100 a month (and can go as high as $250 a month). A Netflix subscription is extremely cheap in comparison.
New content
Netflix is broadening the range of content it offers to attract new subscribers and generate advertising revenues. In October it streamed a live boxing match between Mike Tyson and Jake Paul that was watched by 108m households.
On Christmas Day it streamed a live NFL game with Beyoncé performing a half-time show. Netflix has also launched a streaming gaming offering which, as compute power advances, has the potential to replace the need for gaming consoles in the future.
The outlook for Netflix and its investors today is encouraging. It has become the clear global leader in both content creation and content distribution, it has built a defensive subscription revenue business model with low churn to which it can now add highly profitable advertising revenues, without the need to increase content costs. The implications of this for margin expansion and cash flow growth are very positive.
Earlier this year we initiated a position in Netflix on the promise of its future growth in advertising, subscription revenues, margin, earnings and cash flow, as well as the outstanding quality of its management. The company has disrupted the entire global media industry, whilst at the same time delivering its customers an outstanding product.
Gerrit Smit is manager of the Stonehage Fleming Global Best Ideas Equity fund. The views expressed above should not be taken as investment advice.
After the Covid-19 pandemic, Tom Stevenson explains what investors can learn about diversification, long-term investing and stock-market resilience.
It has been five years of ups and downs for markets since the outbreak of Covid towards the end of February 2020, with next month marking five years since the first lockdown in the UK. Since then, Fidelity International investment director Tom Stevenson said it has been “a rollercoaster for investors”.
Next month will mark the fifth anniversary of the UK’s first lockdown in response to the Covid pandemic. Back in 2020, the MSCI World fell by more than 20% in the month of March – something that proved a buying opportunity. Indeed, since the end of March the global market index is up some 135.3%.
Even accounting for the drop, the MSCI World is up 87.6% over the past five years, while other markets have also risen strongly. Although the past five years may have been volatile, Stevenson said there are crucial lessons that investors can learn from the post-pandemic world.
Performance of global equity markets
Source: FE Analytics
Firstly, he argued that the pandemic should remind investors about the stock market's resilience. "Time is a great healer for investors", he said. Despite high levels of volatility, most major stock markets have risen over the past five years.
The S&P 500 is the most notable, surging 98%, but it was far from the only market to rise. Indeed, the MSCI Europe, FTSE 100, TSE Topix and FTSE All-Share have all risen from pre-pandemic levels.
As a result, Stevenson explained that even a poorly timed investment during the pandemic would have now recovered. Managers at Vanguard agreed, noting even the “world’s unluckiest investor” would have made stellar returns during the post-pandemic recovery.
Stevenson’s second lesson may prove more controversial. He argued the pandemic proved that diversification could be a mixed blessing.
Conventional wisdom dictates that diversification is key to a successful portfolio. For example, last week, St James's Place’s chief investment officer Justin Onuewkusi said the best way to navigate unchartered territory is diversification. “Predictions fail, but diversified portfolios succeed,” he said.
However, Stevenson argued that post-pandemic, the traditional 60/40 approach to diversification offered “mixed results”. He explained that this was because bonds moved in line with equities, which diluted returns for investors.
Last month, Ernst Knacke, head of research at Shard Capital agreed, arguing the traditional 60/40 portfolio was “broken” in the current period of high volatility and high costs.
However, while asset diversification may have failed, Stevenson said that geographic diversification proved more successful. For example, during the 2022 bear market, holding the FTSE 100 would have insulated investors from the tumble experienced by the S&P 500.
Source: Fidelity International. LSEG Datastream, 14/01/2020-14/01/2025. Source: Rebase to 100, S&P 500 Composite, FTSE 100, Bloomberg Global Aggregate USD
The pandemic also demonstrated the importance of regular investing. He said putting £1,200 into the market during the March 2020 low would have grown by 15% for investors over the first year. However, data indicates that a slower and steadier approach would have proven more effective.
Indeed, data from the London Stock Exchange found that investors who spread out £1,200 through 12 monthly sums would have been up by 21% over the same period, a difference of six percentage points.
Source: Fidelity International. LSEG Datastream. 13/01/2020 - 13/01/2021. MSCI World U$
While Stevenson conceded, “this approach does not maximise returns in rising markets”, he noted it can “shield investors from severe market drops”
Another lesson the pandemic demonstrated is the difficulty of picking winning stocks for even the most talented investors. As countries locked down and videoconferencing became more common, stocks such as Zoom experienced a meteoric rise in value, peaking at $559 per share. This proved to be a “flash in the pan”, with shares now back down to $87.
Share price performance of Zoom over the past 5yrs
Source: Google Analytics
Equally, not all businesses that underperformed during the pandemic stayed that way. International Consolidated Airlines' shares fell around 75% during the pandemic, but it has started to rally this year and is now down just 9%.
Performance of IAG over the past 5yrs
Source: FE Analytics.
For Stevenson, the pandemic also reminded investors that contrarian investing was “not for the faint-hearted” but can be rewarding. A willingness to be contrarian can sometimes pay off handsomely but investors will need to take some lumps along the way.
If an investor had been brave enough to invest £100 in the MSCI World in March 2020, it would now be worth £230, but they would have had to stomach losses of up to a third in the short term.
However, Stevenson argued: “To achieve this would have required perfect timing, which is nearly impossible”.
Indeed, the market rebounded quickly, recovering to pre-pandemic levels by August. As a result, investors had less than half a year to get the timing right.
Stevenson said: “The hardest thing about market timing is less knowing when to get out and more having the courage to get back in again before the moment has passed.”
If history is anything to go by, the current discount levels are “the best time to invest”, according to the AIC.
Investment trusts have been on double-digit discounts for 29 consecutive months, the longest period in 30 years, the Association of Investment Companies (AIC) has revealed.
This is even longer than during the financial crisis, when double-digit discounts only persisted for 25 months between September 2008 and September 2010. The previous record, however, was 27 consecutive months in the period between August 1998 and October 2000.
There is one thing that these time frames have in common, according to Nick Britton, AIC research director, enhanced returns in the following five years.
“Discounts can spell opportunity when it comes to investment trusts. Our research shows that investing at double-digit discounts is generally good for your pocket,” he said.
“Previous periods like this have ended with some combination of market recovery and corporate activity – and there’s no reason to think this one will be any different.”
As for how much investors have made previously, the AIC has calculated that average returns can be as much as 32.7 percentage points higher after a long period of double-digit discounts, amounting to 4.3 percentage points higher per annum, compared to periods when the discount was below 10%.
More specifically, this has emerged by analysing 139 overlapping five-year periods (the first one beginning on 1 July 2008 and the last one on 1 January 2020); in 105 of these five-year periods, where the starting discount was narrower than 10%, the average return was 53.8%, or 9.0% annualised. In the remaining 34 five-year periods, the starting discount was wider than 10% and led to an average return was 86.5%, or 13.3% annualised.
Today, investors should act quickly, as the average discount to net asset value across the whole universe is 14%, having peaked at 19% in October 2023.
All figures exclude venture capital trusts (VCTs) and 3i Group, one of the best performers of 2024 and one of the most expensive trusts on the market, trading at a premium of nearly 60% .
“The current period of double-digit discounts has been long, but it can’t last forever,” said Britton. “It can be hard to invest when sentiment is downbeat, but history shows this is usually the best time.”
Source: Association of Investment Companies.
This is something private and activist investors are well aware of with a number starting to act and in some cases making headlines, such as Saba Capital’s requisition attempts.
But while discounts are great for those looking to buy, the same isn’t true for every investor and for all sectors.
Emma Bird, head of research at Winterflood Securities, attributed the widening of the average discount in 2024 to a number of reasons, including negative sentiment towards investment trusts with high weighting to interest rate sensitive asset classes, such as infrastructure, property, private equity and growth-oriented equities.
“A lack of demand from both institutional and retail investors in an environment where ‘risk-free’ returns remained much higher than recent history, will have weighed on discounts,” she said.
“Some sector-specific concerns continued to have a negative impact on sentiment too, particularly amongst institutional investors, including cost disclosure rules and an increasing demand for liquidity and scale.”
She agreed, however, that the discounts offer an attractive entry point in some areas, particularly rate-sensitive asset classes.
“These areas have the potential for a ‘double whammy’ of improving net asset value (NAV) performance and a positive re-rating if gilt yields see a sustained decline, especially if this acts as a catalyst for retail investors to re-enter the investment trust market,” the researcher said.
“Nevertheless, given that interest rates are unlikely to return to near-zero levels any time soon, the extent of this re-rating may well be limited.”
For Abbie Hines-Lloyd, associate director of Research in Finance, discounts remain “a significant factor in what makes investment trusts appealing”.
However, “stubborn discounts can be problematic for those who have already weathered several market cycles, and who may be more focused on cashing in their investment than seeking new buying opportunities”.
Five Hargreaves Lansdown-run funds were recognised as being ‘in need of work’ overall by the platform.
The HL Emerging Markets and HL Global Bond funds have been judged “poor value” and three more “require additional focus” in Hargreaves Lansdown’s value assessment.
In the latest edition of the annual report, which covered the 12 months from September 2023 to September 2024, the platform assigned a red, yellow or green tier to each of its funds with a track record of at least 12 months. Funds were scored in seven areas – service quality, performance, costs, economies of scale, market rates, comparable services and share class.
Of the 19 funds included, 10 were flagged as requiring some work in at least one of the above areas.
HL Emerging Markets didn’t pass the review for its poor performance – an improvement from last year, when it was also found lacking because of its high fees, which have since been reduced by 11 basis points to the current ongoing charges fee (OCF) of 1.16%.
Since then, the fund was repositioned towards “a more disciplined approach” with a focus on emerging markets rather than Asia and emerging markets and the then eight-strong portfolio management team was restructured with three removals and one addition.
Performance of fund against sector and index over 1yr
Source: FE Analytics
The report read: “The short-term impact of changes has yielded positive results as we are now seeing a stabilisation in the performance numbers, though not enough to move to the amber tier.”
In the past 12 months, the fund has beaten its benchmark and sector, as shown in the chart above.
The second and last fund not worth investors’ money is HL Global Bond, which has been delivering poor performance for an above-market cost.
Reportedly, manager selection contributed positively, but the global allocation was a headwind against a peer group with a bias towards UK bonds. The underperformance has continued into the past 12 months, as the chart below shows.
Performance of fund against sector and index over 1yr
Source: FE Analytics
Hargreaves’ policy has been to work towards a “more disciplined approach to asset allocation, a more global positioning as well as changes to manager selection”; it also reduced the allocation to total return funds and added “several global managers with clear track record” in delivering outperformance in specific markets.
HL Multi-manager European, HL Multi-manager UK Growth and HL Select UK Income are the three funds “in need of work”.
For the former, costs and performance have improved from red to amber since last year, as the platform’s ongoing monitoring has been focusing on “maintaining an appropriate blend of holdings, while always being on the lookout for ways to improve the portfolio”.
A number of changes have also affected the UK multimanager strategy, which became less sensitive to style rotations and re-thought some of its positions, including exiting a main holding within the fund following the departure of its manager.
Finally, the managers of the HL Select Income portfolio have been at work to increase diversification within the fund by raising the numbers of companies held and raising exposure to some faster-growing dividend-paying companies, such as Games Workshop, Kainos Group and Ryanair.
Eligible funds with red or amber ratings
Source: Hargreaves Lansdown
Experts point to Europe and infrastructure funds as great complements to a world tracker.
Global trackers have become extremely popular with investors. In theory, they should bring diversification to a portfolio, ensuring people are investing in line with the allocations of the market. However, with markets increasingly concentrated around a small handful of stocks, global trackers' ability to diversify portfolios have challenged.
As Darius McDermott, managing director at FundCalibre, said: “If you hold the world index, by definition, you probably hold about 70% US and 30% tech”. More than 20% of that would be in the Magnificent Seven (Microsoft, Nvidia, Apple, Tesla, Alphabet, Meta and Amazon).
Laith Khalaf, head of investment analysis at AJ Bell, explained that this was fine if investors were comfortable with this level of exposure. However, he added that recent wobbles in the Magnificent Seven’s share price due to the unveiling of DeepSeek may provide a “timely nudge for investors to check in on their overall exposure to the US stock market.”
Below, fund selectors identified a range of funds across different markets and sectors that could complement investors' traditional global trackers.
WS Lightman European
For McDermott, the perfect complement to a global tracker would depend on “where you want your diversification”. However, he suggested that a value or income strategy would make a “good complement to a growth-dominated global index”.
He pointed to the £850m WS Lightman European fund, managed by Rob Burnett, as a good choice for this. Over the past five years, it has risen 58.3%, a top-quartile performance in the IA Europe Excluding UK sector.
Performance of fund vs the sector and benchmark over the past 5yrs
Source: FE Analytics
McDermott explained that Burnett emphasised stocks with low price-to-book and price-to-earnings ratios and attractive cashflow yields. “Burnett believes these are the best characteristics over the long-term for European shares”, McDermott added.
While the portfolio has slid into the third quartile over the past one and three years, McDermott argued that it remained a highly robust value play that investors should not underestimate.
McDermott said: “As one of the few remaining true European value funds, Lightman stands out as a contrarian complementary option”.
Vanguard FTSE Developed Europe Ex-UK UCITS ETF
Bella Caridade-Ferreira, chief executive officer at Fundscape, was also a fan of Europe. “There is plenty to like in European stock markets,” she said. She noted Europe is home to the 'Granolas' – 11 large European stocks that dominate its stock market, covering a range of sectors from technology to healthcare and consumer products. These include GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LVMH, AstraZeneca, SAP and Sanofi.
“Over the past three years, the Granolas have performed in line with the Magnificent Seven with lower volatility (although there was some volatility in the second half of 2023)”, Cardade-Ferreira explained.
She identified Vanguard FTSE Developed Europe Ex-UK UCITS ETF as an attractive option for passive exposure to these European stocks. Despite being a tracker, it has slightly outperformed the market, with a total return of 50% over the past five years.
Performance of the fund vs the sector and benchmark over the past 5yrs
Source: FE Analytics
She added that holding this fund would position investors well for a European resurgence. For example, ASML has reported strong earnings, while Novo Nordisk has benefitted from recent consumer enthusiasm for weight loss drugs.
Caridade-Ferreira concluded: “With everyone wishing for a magic cure for those extra inches, it looks as though Europe could do well in 2025” and would complement a world tracker.
Abrdn Global Infrastructure Equity
Katie Trowsdale, co-manager of the abrdn Myfolio Managed range, pointed to the £325.3m abrdn Global Equity Infrastructure fund. The range recently shifted its mandate to allow the managers to invest more in external funds, but Trowsdale stayed among the abrdn stable for her pick.
The fund has delivered 108.3% in the IA Infrastructure in the past 10 years. It was in the top quartile over the past three years but slid into the second quartile last year.
Performance of the fund vs the sector over the past 10yrs
Source: FE Analytics
For Trowsdale, the fund’s focus on essential infrastructure, such as transportation and energy, means it invests in businesses with stable cashflows. Additionally, she explained that infrastructure frequently benefits from cross-political government support and regulation, which brings an “extra layer of security”.
Moreover, infrastructure investments tend to have a “lower correlation with broader equity markets”. This can make investing in them an effective way of enhancing portfolio resilience and protecting from downturns that may hit the broader equity market.
She said: “By combining the broad market exposure of a global tracker with the stability and growth potential of this fund, investors can achieve a more balanced portfolio.”
Canada imposes counter-tariffs, while China plans to retaliate.
Stock markets began the week spiralling downwards after US president Donald Trump announced a 25% additional tariff on Canadian goods and a 10% additional tariff on Chinese imports this weekend. These measures will come into effect on 4 February.
Trump is also planning to levy tariffs on the European Union, although no timeline has been set. The UK might escape if he can reach a deal with prime minister Kier Starmer.
The US president had also announced he would tax Mexico an additional 25% over the weekend but has backtracked on that today after Mexico agreed to supply 10,000 soldiers to the border between the two countries, according to a statement made on social media site Truth Social.
“These soldiers will be specifically designated to stop the flow of fentanyl, and illegal migrants into our country,” he wrote.
“We further agreed to immediately pause the anticipated tariffs for a one-month period,” he added, to allow negotiations between the countries.
Trump’s sudden imposition of tariffs took the market by surprise, said AJ Bell investment director Russ Mould. “Financial markets had assumed that Trump would talk tough on tariffs and back off when he got a deal, so the US president’s plan to act first and then (perhaps) talk has come as a nasty surprise to share prices around the world.”
John Plassard, senior investment specialist at Mirabaud Group, agreed: “Soft power is out. Hard power is the order of the day. These tariffs are not mere trade adjustments: they are a declaration of economic war designed to force the United States’ main trading partners to bend to Washington's will. In this new era, Trump is not negotiating; he is dictating terms.”
America’s trading partners retaliate
Canada will bring in counter-tariffs of 25% tomorrow on a range of US products, including orange juice, peanut butter, wine, coffee, motorbikes and cosmetics. A longer list of US-made products will become subject to tariffs later this month after a 21-day consultation period, including cars and trucks, steel, aluminium, beef and ships.
Mexico had previously made plans to retaliate before the latest development earlier today. President Claudia Sheinbaum had asked her economy minister Marcelo Ebrard to implement ‘Plan B’, which aimed to mitigate the economic impact of tariffs without escalating tensions with the US.
China, meanwhile, has vowed to take “necessary countermeasures to defend its legitimate rights and interests”. Plassard thinks China could impose export controls on key minerals and might restrict market access for US companies. Additionally, China could allow the yuan to depreciate to offset the effects of the tariffs and support exports, he added.
What is the potential impact on Europe?
Trump told reporters this weekend that EU tariffs would “definitely happen”.
“They don't take our cars, they don't take our farm products. They take almost nothing, and we take everything from them – millions of cars, tremendous amounts of food and farm products,” he said, adding the EU is “really out of line” while he will “see” about the UK.
A hypothetical 10% tariff on European goods would equate to a 1% contraction in eurozone GDP, which would reduce corporate earnings per share by 6-7% by the end of 2025, according to forecasts from Goldman Sachs.
Plassard said: “This would not be a minor adjustment, but a direct blow to the heart of Europe's economic engine. But the figures only tell part of the story. Business uncertainty acts like a slow poison, seeping into boardrooms and freezing investment decisions.
“The euro/dollar, often seen as a barometer of global confidence, could plunge if new tariffs are announced, recalling the sharp corrections seen in previous crises.”
Plassard anticipates Europe’s automotive and chemical industries would be hardest hit by tariffs.
What impact did tariffs have during Trump’s first term?
This isn’t Trump’s first rodeo. He initially launched tariffs back in 2018, which raised revenues but harmed US corporate profits and sent the S&P 500 tumbling by a fifth.
Plassard said: “The first wave of tariffs targeted solar panels (30%) and washing machines (20-50%) in January, followed by sweeping tariffs on steel (25%) and aluminium (10%) imports in March.”
China, the EU, Canada and Mexico responded with counter-tariffs on American exports including soya, whiskey and cars.
Then in mid-2018, the US imposed tariffs on $250bn of Chinese products and China retaliated with tariffs on $110bn worth of American products.
Tariffs and trade wars caused volatility across financial markets, Mould said. “The S&P 500 started 2018 well but finished it badly, as a one-fifth fall in the autumn wiped all of the year’s gains – and more. The US equity market started 2018 on 23x forward earnings and ended it closer to 19x, thanks to the autumnal slump.”
Performance of US and global equities in 2018
Source: FE Analytics
Mould continued: “Ultimately, the S&P 500 gained 56% during Trump’s first term, but that came with a big wobble in 2018, when the index lost 5% overall and endured a mini bear market in the autumn, as threats of tariffs on China became reality.”
Despite current fears about the inflationary impact of tariffs, US prices actually fell in 2018, as the chart below shows.
US price increases for gross domestic purchases and personal consumption of goods
Sources: US Bureau of Economic Analysis, AJ Bell
“This may have been because the best cure for high prices is just that – high prices – with the result that consumers and companies refused to pay them and sought out cheaper options (which is precisely the Trump plan this time around),” he said.
“But it may have also been because American importers and foreign sellers into the US elected to take the hit on margin and did not pass on the cost impact of the tariffs.”
US corporate profits shrank as a percentage of GDP in 2018, which suggests that companies took the margin hit, he continued.
Plassard added that, despite Trump's best efforts to reduce America’s trade deficit, it actually widened to a record $891bn at the end of 2018.
Baillie Gifford US Growth and Keystone Positive Change defeat Saba’s resolutions.
The boards of Baillie Gifford US Growth and Keystone Positive Change achieved decisive victories today as Saba Capital Management’s proposals to unseat them were defeated.
The majority of Baillie Gifford US Growth trust’s shareholders made their voices heard, with votes cast representing 78.4% of total voting rights. Excluding Saba’s votes, 98.5% of the votes cast for US Growth and almost 99% for Keystone were against Saba’s resolutions.
Tom Burnet, chair of Baillie Gifford US Growth, said: “Faced with the threat to their investment posed by Saba's self-serving and destructive proposals, shareholders have mobilised and acted decisively to protect their investment. The result is unambiguous and conclusive.”
Saba had proposed replacing both trusts’ entire boards with two of its own nominees: its chief investment officer Boaz Weinstein and Miriam Khasidy, a legal and business professional, at Baillie Gifford US Growth; and Saba portfolio manager Paul Kazarian plus John Karabelas, head of US institutional sales at MUFG, at Keystone.
If successful, the new directors would have considered replacing Baillie Gifford with Saba as the trusts’ investment manager and changing their mandates to investing in discounted trusts.
Saba also said it would consider liquidity events, yet these are already underway at Keystone Positive Change. The trust has offered shareholders an uncapped cash exit and/or a rollover into a similar open-ended fund, Baillie Gifford Positive Change.
Saba’s campaign revolved around wide discounts and underperformance at seven companies, but the US Growth trust’s discount has narrowed significantly over the past few months as its share price soared. The trust’s total return in 2024 reached 56%, more than double the S&P 500’s 26.7% in sterling terms.
Performance of trust vs sector and benchmark over 1yr
Source: FE Analytics
Saba lost its battle to take over Herald on 22 January and faces the judgment of shareholders in Henderson Opportunities and CQS Natural Resources Growth & Income tomorrow.
The European Smaller Companies Trust will meet on Wednesday 5 February and Saba’s campaign concludes with Edinburgh Worldwide on 14 February.
Meanwhile, Henderson Opportunities announced proposals this morning to wind up. Shareholders will be able to choose between receiving cash, rolling their investment into a similar open-ended fund – Janus Henderson UK Equity Income & Growth – or a combination of both.
James Carthew, head of investment companies at QuotedData, said Herald's emphatic rejection of Saba's proposals last month gives him hope that Saba will lose all of these votes.
“One positive result may be that investors are better able and more likely to vote at company meetings in future,” he said. “Real change seems to be happening at some platforms and a change of company law to enforce shareholders' rights may not be far behind.”
Keystone Positive Change was the most bizarre of Saba's targets, he continued: “Why would an activist claiming to be acting in investors’ best interests seek to block a cash exit? The optics were dreadful and made us question from the start whether Saba really knew what it was doing.”
If the stimulus does prove more meaningful, there is no doubt China looks an attractive prospect.
Say goodbye to the dragon and hello to the snake. In the Chinese zodiac, the snake is associated with wisdom, charm, elegance, and transformation. Unfortunately, investing in China in the past few years has been like a game of snakes and ladders – with some very long snakes and some very short ladders!
A horrible mix of poor demographics, increased regulation, a collapsing property market, geopolitical concerns and a range of low quality companies – have led some to question whether China is in a long-term structural decline.
Every time a possible recovery has been mooted it has run out of steam. The hope is the announcements of policy change by the Chinese government in September last year – interest rate cuts, more liquidity for banks, additional property reforms as well as funding initiatives for the stock market – are more meaningful for a long-term recovery.
It is now something of a waiting game – details on the highly anticipated fiscal support won’t likely come until an annual parliamentary meeting in March – when there should also be more clarity on the tariff situation as Trump 2.0 kicks into gear.
Does the consumer buy into China’s own ‘American Dream’?
There are undoubtedly long-term challenges China has to tackle, at the heart of which is the move to a consumer-led economy – something it needs the consumer onside for. This brings me back to a conversation I had a few years ago with former Murray International manager Bruce Stout.
We discussed the first round of trade wars and his view was that the real reason behind them was the US being unable to accept there is going to be a decline in standard of living – because the unfunded liabilities on the sovereign balance sheet are huge (under-funded pension and healthcare liabilities).
These are what people bought into the American Dream for in the 1950s and 1960s – the ideal that the state would look after them at retirement age. Now they’ve got to retirement age to find out otherwise.
China is now having its own stab at the American Dream – when you’re moving to a consumption-led economy, households start to leverage. This may mean large levels of debt – something the consumer appears very resistant towards.
China has historically maintained a very high long-term savings rate, consistently ranking among the highest in the world, with household savings around 44%, and concerns about retirement and social savings rife.
Family bank balances have increased 80% from the start of 2020 (the start of the Covid-zero policy). The net increase in household bank accounts is equal to $9.2trn – greater than the GDP of Japan in 2023.
You can understand that caution. The collapse in the real estate market has been palpable for the consumer – the typical Chinese household has 60% of their assets in residential real estate.
Unemployment among the younger generation is rising and cost-cutting measures among this group are rife. I recently read that influencers are also sharing tips on turning financial discipline into a lifestyle. Posts on China’s own version of Instagram (Xiaohongshu) on how to save money total more than 1.5 million with more than 130 million views.
The government has introduced some initiatives to help tackle this. Pensions are a key factor in this, with retired urban salary workers earning $461 in retirement, while the less fortunate urban unsalaried and rural workers receive just $25. The government has introduced an increase in the retirement age from 60-63 for men and 55-58 for white-collar women (50-55 for blue collar) to tackle this burden.
China has already issued 81 billion yuan for this year’s trade-in programs. It covers more home appliances, electric cars and an up to 15% discount on smartphones priced at 6,000 yuan or less. It allows consumers with less money to shorten their upgrade cycle and encourage greater consumption.
The weakness in consumption matters more than ever because, with the exception of Covid, China is currently more reliant on exports to drive its economy than at any point since the 2000s.
While the US only accounts for 15% of China’s exports, it is still the single largest trading partner and more than 3x larger than the next largest export destination. Exports to the US account for approximately 4% of China’s GDP. If the US reduces demand for Chinese goods, it will hurt the economy.
But there are opportunities for investors
If the stimulus does prove more meaningful, there is no doubt China looks an attractive prospect. The forward price-to-earnings ratio of the Chinese market (as measured by the MSCI China) is just over 10x. That compares with over 18x for the MSCI All Country World index. Chinese equities are trading at a huge 55% discount to US equities.
The message from fund managers appears to be that there are selected opportunities, but with great caution needed.
JPMorgan China Growth & Income Trust manager Rebecca Jiang is looking for opportunities in the consumer discretionary sector, which she believes should benefit from increased household wealth due to stabilising housing prices.
“We are also increasing exposure to cyclical sectors like the electric vehicle (EV) battery space, where supply-and-demand dynamics are showing marginal improvement after a prolonged industry downturn,” she said.
Fidelity China Special Situations manager Dale Nicholls also believes the consumer sector offers some of the best ideas, such as e-commerce platform retailer PDD.
He also identifies innovation in the likes of technology – citing auto services provider Tuhu Car and freight services provider Full Track Alliance, both of which are using digital platforms to lower cost and improve services. Another area he sees good innovation in is industrials.
Clearly China is not without risk, but it does appear the policy pivot is a meaningful one and with prices as they are, China could offer an attractive entry point for medium to long-term investors.
Those looking for exposure to China beyond a pure China strategy – like FSSA All China or those mentioned above – might consider the likes of Invesco Global Emerging Markets or the FP Carmignac Emerging Markets fund.
Darius McDermott is managing director of FundCalibre. The views expressed above should not be taken as investment advice.
Indian equities disappointed as Europe and Latin America funds shone.
The start of 2025 has been eventful with the inauguration of US president Donald Trump and the emergence of a new artificial intelligence model from China’s DeepSeek.
We start with Trump, where an unprecedented number of executive orders during his first few days in office set the tone for what could be a busy four years for the US government.
Ben Yearsley, director at Fairview Investing, said: “The first 10 days or so of the second coming have been a whirlwind of histrionics, hyperbole and tariff threats.”
Trump has “wasted no time offending countries/continents/Democrats” while also threatening, imposing, rescinding and reimposing tariffs, he noted.
“The tariff question is the obvious elephant in the room. Colombia buckled rather quickly at the threat of them, what will Canada, Mexico and China do in response to being the first countries to be hit. And how long before Europe gets the tweet?” Yearsley asked.
Trump has also weighed into the tech space, telling US companies to improve in the face of the new DeepSeek threat, which has launched a new artificial intelligence (AI) model that requires much less computing power than incumbent products. “This hammered US tech for a few days with Nvidia losing $600bn in a day,” Yearsley said.
Despite all of this, equity markets held up well, with all major indices up in the month of January. The FTSE 100 hit several all-time highs, although Yearsley noted it remains “cheap compared to history”. However, it languished behind the “surprise January package” that was European markets, which topped the tables.
Performance of indices in January
Source: FE Analytics
“Maybe it’s the actions of the European Central Bank with another rate cut that is helping propel markets,” said Yearsley. The EuroStoxx gained over 8.6% in January, despite myriad issues including the threat of tariffs from Trump, ongoing war in Ukraine and political uncertainty overhanging from elections in 2024.
In terms of how this impacted funds and investment trusts, Latin America was the place to be invested, with the relevant Investment Association and Association of Investment Companies (AIC) sectors topping their respective lists.
“After a poor 2024 when Latin American funds propped the tables falling 25% on average January feels somewhat of a rebound – is it a dead cat bounce though?” asked Yearsley.
Among fund sectors, this was followed by IA Europe Excluding UK, alongside thematic specialists IA Financials and Financial Innovation and IA Healthcare.
Source: FE Analytics
On the investment trust side, IT Technology & Technology Innovation still performed well despite the DeepSeek tech sell-off, with IT Europe, IT European Smaller Companies and IT Commodities & Natural Resources rounding out the top five.
The latter may hint to why Latin American funds and trusts also performed well. The region is synonymous with mining and price rises are often seen as positive for the region.
This can also be seen in the list of top-performing funds, where the top seven are all related to gold and other precious metals.
They were joined by Latin America specialists, while there were no European funds in the top 20, despite the market performing well.
Source: FE Analytics
In the Investment Association it was almost a clean sweep of gains, with 47 of the 49 sectors delivering a positive return last month. India the worst sector falling 5.4% while UK small-caps were the only other group in the red, down 0.9%.
Like the list of winners, the table above shows 16 of the 20 worst funds in January were India specialists, with Invesco India Equity down the most, registering a 10.6% loss.
Outside of India, FP Octopus UK Micro Cap Growth and MI Canaccord Genuity UK Smaller Companies both made losses of more than 5% as the UK minnows continue to be hit harder than the rest of the domestic market.
In the investment trust space, Ground Rents Income topped the table after it received an offer to go private at a substantial premium to the prevailing share price but below the last published net asset value.
“This could be the trend for 2025 – an esoteric trust being taken over topping the tables each month,” said Yearsley.
Other names of note including Scottish Mortgage, which rose 13.7%, making it one of the month’s biggest gainers, as well as Baillie Gifford European Growth Trust, which was up 12.1%.
The FTSE 100 seems to have finally shrugged off its Brexit-related woes to reach an all-time high.
Friday 31 January 2025 marked the five-year anniversary of the UK’s withdrawal from the European Union and the FTSE 100 celebrated by hitting an all-time high that morning.
But that news masks a tumultuous five years during which UK equity funds have suffered unrelenting outflows and significantly underperformed US stocks.
The Covid pandemic, which began just after Brexit, exacerbated the shock to the UK economy – as did the inflation spike of 2022 and subsequent aggressive interest rate hikes.
Last year marked the ninth consecutive year of outflows from UK-focused funds, according to Calastone’s Fund Flow Index. They shed £9.6bn in 2024, which was less than 2023’s £12.1bn. However, compared with the huge inflows other equity funds enjoyed, 2024 was the UK’s worst year for relative flows on record.
20250131_Brexit_8
Ed Legget, manager of Artemis UK Select, thinks international investors didn’t understand Brexit or the subsequent state of UK politics and felt the UK was just too complicated to invest in, especially as it is such a small part of global benchmarks (3.1% of the MSCI All Country World Index as of 31 December 2024).
Investors pulling money out of the UK to invest in the tech-heavy US market would have been well rewarded, as the chart below shows.
Performance of UK equities vs other regions over 5yrs
Source: FE Analytics
Even so, the FTSE All Share’s compound annual return of 6.3% since 31 January 2020 is comfortably ahead of GDP growth and cumulative inflation, said Russ Mould, investment director at AJ Bell. “It is therefore quite possible to argue that UK equities have been fairly resilient during the five-year period, given uncertainty over what the outcome would be, the after-effects of Covid-19 (and the damage done to the public finances) and other global events during the period, notably wars in Eastern Europe and the Middle East,” he pointed out.
“Equally, sceptics could argue that the UK stock market has been held back. The Stoxx Europe 600 index has a provided compound annual return of 8.6% a year since 31 January 2020, Japan’s Nikkei 225 13.7% and America’s S&P 500 has more than doubled the returns from the UK with a compound annual total return of 14.9% a year.
“Sterling still trades below the $1.31 level at which it stood five years ago, although it is a fraction higher against the euro compared to January 2020 (but not June 2016). This suggests some overseas investors remain reticent about holding sterling-denominated assets.”
How has Brexit impacted the UK stock market?
Brexit had a far more detrimental impact on the stock market during the period between the 2016 referendum and the UK leaving the EU, said Legget. Speculation about whether the UK would crash out of the EU without a deal caused volatility because “stock markets hate uncertainty”.
“You didn’t know what type of Brexit you were going to get. You didn’t know if everyone was going to walk out of the negotiating room at two minutes to midnight and borders would shut, so that wasn’t good for UK risk assets,” he explained.
The chart below shows the performance of the FTSE All Share from 7 May 2015, when David Cameron’s Conservative party won the election and he announced an in/out referendum in his victory speech, though the referendum itself on 23 June 2016, until the UK officially left on 31 January 2020.
Performance of UK vs global equities, 7 May 2015 to 31 Jan 2020
Source: FE Analytics
Brexit has been cited as a factor prompting companies to move their listings abroad. This and the dearth of initial public offerings are often “used as sticks with which to beat the London Stock Exchange”, Mould said, yet he feels Brexit is not the root cause.
“The number of stocks listed in the US has halved over the past 40 years and developed markets such as Singapore and Australia are also shrinking as firms are acquired and new floats prove relatively rare,” he noted.
“There are long-term trends at work here where Brexit has little or no influence, including how cheap debt has been relative to equity for companies for more than a decade, the rigours and regulation and reporting requirements of listed firms and the rise and rise of private equity, itself a beneficiary of cheap debt, which allows firms to find funding away from public arenas.”
Sectors that have flourished and struggled
The Cboe Brexit High 50 and Low 50 indices, comprised of the 50 companies within the Cboe 100 UK index that derive the largest and smallest portions of their revenues from the UK, respectively, serve as a bellwether for how Brexit has impacted British companies.
As the chart below shows, companies earning more of their revenues abroad fared marginally worse between December 2020 and July 2021 but outperformed significantly between 31 January 2022 and 10 September 2024. The gap has closed in recent months however, with the Cboe Brexit Low 50 index finishing ahead by four percentage points.
As Legget observed: “Weak sterling is a tailwind for anyone who’s got overseas earnings when they report that back into sterling.”
Performance of Cboe Brexit High 50 and Low 50 indices over 5yrs
Source: FE Analytics
An additional dynamic has been the significant underperformance of small- and mid-caps, which are more exposed to the domestic economy than larger businesses.
Performance by market cap and style over 5yrs
Source: FinXL
In terms of sectors, industrials, basic materials, financials and energy have all outperformed the broader market, as the chart below illustrates.
Performance of UK industries over 5yrs
Source: FinXL
Within industrials, Rolls-Royce had a management turnaround and a post-Covid recovery in its end markets. BAE Systems has benefited from defence spending becoming a higher priority for governments as geopolitical tension has escalated.
Elsewhere, Banks and energy stocks have performed well in an environment of higher interest rates and inflation, said Legget, whose Artemis UK Select fund is the best performer in the IA UK All Companies sector over the five years to 30 January 2025, up 77.8%.
Prior to Brexit, banks and energy companies endured 10 years of material headwinds during which they reduced their cost bases and transformed their businesses to make them more competitive. Now they are reaping the rewards of top-line growth combined with less debt and lower costs, he explained.
At the other end of the spectrum, telecommunications and property lost money. The consumer staples and discretionary sectors also underperformed, reflecting the impact of inflation, the cost-of-living crisis and higher mortgage rates on people’s propensity to spend.
Tom O’Hara, Jamie Ross and David Barker have jumped ship.
Tom O’Hara will leave Janus Henderson Investors to head the newly created European equity team at GAM Investments, the firm has announced this morning.
He will be moving in the coming months together with Jamie Ross, O’Hara’s co-manager at the helm of the Henderson European Trust, and with research analyst David Barker.
O’Hara has been co-manager on the trust since 2020, working alongside former veteran fund manager John Bennett, who retired in the third quarter of 2024 to focus on overseeing Rangers Football Club.
At Janus Henderson, O’Hara and Ross managed more than €6.5bn in European equity funds – both for institutional and retail clients globally. In the five years of O’Hara’s tenure, both the trust and the open-ended vehicle Janus Henderson European Selected Opportunities, which he has been co-managing with Tom Lemaigre, have outperformed their sectors and index, as the chart below shows.
Performance of vehicles against sectors and index during manager’s tenure
Source: FE Analytics
The team will take on the GAM Star European Equity and GAM Star Continental European Equity funds.
O’Hara said: “I look forward to contributing to the renaissance of GAM under new, long-term focused majority ownership.”
Elmar Zumbuehl, chief executive officer at GAM was confident the team’s track record and investment approach would lead to “excellent client outcomes”.
He said: “Attracting such exceptional investment professionals underscores GAM’s distinctive and attractive culture, our strategy, and long-term promise.”
Further details are still to be announced.
A quarter of the platform’s list of favourite funds was replaced in 2024.
With a pool of 88 previously listed funds to re-assess, 10 removals and 10 additions in 2024, AJ Bell’s Favourite Funds list has changed the most when compared to its four main competitors.
The analyst team headed by AJ Bell head of investment research Paul Angell made almost double the number of changes compared with the authors of Hargreaves Lansdown’s Wealth List, Barclays’ fund lists and Fidelity’s Select 50, while the number of changes was close to that of interactive investor’s Super 60 (18). Some 25% of the AJ Bell best-buy list now looks completely different to a year ago.
Some of the changes were covered before on Trustnet. Among the several additions, some of the most notable were the Fidelity Special Situations, Janus Henderson UK Responsible Income and WS Gresham House UK Smaller Companies funds – all of which we covered last week.
Source: Trustnet
Then there were a few deletions, as we reported two weeks ago. For the FTF Martin Currie UK Smaller Companies and Montanaro UK Income funds, among others, losing AJ Bell’s approval meant that these strategies lost their overall status as best-buy funds, as no other platforms recommend them.
Other vehicles lost out on AJ Bell’s blessing but are still highlighted by others. This is the case for WS Amati UK Listed Smaller Companies, Baillie Gifford Japanese and iShares Japan Equity Index (UK).
Below, we asked Angell why the number of tweaks was so high this year. He explained that the reasons are neatly split across three camps. First: manager changes.
“Invariably any fund list containing active funds will see some turnover over a 12-month period due to portfolio manager departures, and 2024 was no exception,” he said.
In the first half of the year, the analyst waved goodbye to three funds on this basis – Fidelity Global Special Situations (as Jeremy Podger ended his 12-year tenure on the fund), Jupiter UK Special Situations (known as Jupiter UK Dynamic Equity since Ben Whitmore departed to set up his own boutique, Brickwood Asset Management) and Allianz Strategic Bond (in light of Mike Riddell’s move to Fidelity).
“We did not believe the list required replacements for the former two, however we did for the latter, as we welcomed Waverton Sterling Bond”.
This does not necessarily set AJ Bell apart from other best-buy lists, with interactive investor, which also had a exceptional number of reviews of its Super 60 list in 2024, also mentioning manager changes as the main culprit.
However, Angell explained the AJ Bell platform added an “in-depth sector-by-sector review to its research process” over the course of the year, which is the second reason for the edits.
“All Favourite Funds selections are under constant review within our research process. However, in 2024 we supplemented this with an additional monthly sector review process, whereby we take one sector per month and do an even deeper analysis of the funds on our list versus the wider market,” he explained.
“Within this analysis, we also review the blend and quantity of options we have available on the list. This led to some turnover for the first four sectors under the spotlight”.
These were: Japanese equities (bringing in M&G Japan and Fidelity Index Japan in favour of Baillie Gifford Japanese and iShares Japan Equity Index), UK All Companies and UK equity income (adding Fidelity Special Situations and Janus Henderson UK Responsible Income in place of Man Undervalued Assets and Liontrust Sustainable Future UK Growth) and UK smaller companies (where WS Gresham House UK Micro Cap replaced both FTF Martin Currie UK Smaller Companies and WS Amati UK Listed Smaller Companies).
Source: Trustnet
The Amati fund was expunged in October 2024 for concerns that its manager, Paul Jourdan, might be “overstretched” in his multiple positions.
“Jourdan, has shown he is a capable investor with a strong track record investing in the sector,” Angell said. “But we believe he may be overstretched in his roles as lead portfolio manager on this fund, the Amati’s venture capital trust and an inheritance tax offering, alongside his responsibilities as chief executive officer.”
Baillie Gifford Japanese, meanwhile, was the victim of its own signature style.
“Though we still consider the fund to be a solid option for investors, the fund’s growth investment style can, and has, caused long periods of variable performance versus the fund’s core index,” noted Angell. “As such, we view the more balanced investment approach of the M&G Japan fund to be preferable for investors.”
The last factor having an impact on AJ Bell’s best-buy list was its choice to deepen the range of passive options, expressed through the addition of four funds, HSBC FTSE All-World Index Tracker, HSBC Global Government Bond ETF, HSBC Global Corporate Bond Index and Vanguard Global Corporate Bond Index.
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