In the event, there was no explosion. Instead, there was a clean-up effort that lasted years and the undamaged reactor did not reopen until 1985. However, the public’s confidence in the safety of nuclear power had eroded and Three Mile Island was eventually closed in 2019.

Grow your own

Despite the energy source remaining shrouded in speculation, in September 2024, Constellation Energy announced that Three Mile Island would be reopening, with Microsoft as the sole purchaser of its energy on a 20-year contract. The motivation? Powering Microsoft’s data centres for the growing presence of AI.

Microsoft is far from the only company to anticipate the burgeoning need for energy in coming years and to take matters into its own hands. However, as investments in AI have shot up in recent years, investments in energy, and specifically renewable energy, have tanked.

See also: Aegon: Data centres are the new dividend drivers

By 2030, the US Electric Power Institute estimates the energy demands of data centres could account for more than 9% of all US energy consumption. Currently, this sits at 4%. Jim Wright, fund manager of the Premier Miton Global Listed Infrastructure fund, says the phenomenon could lead to “a land grab” for energy supply and generation, exemplified by the Microsoft deal.

“The requirement for additional electricity will stretch the system capacity, particularly at seasonal and daily demand peaks. The inevitable solution is more investment in generation capacity, which will include renewables, batteries, gas-fired generation and nuclear power,” Wright explains.

“The costs, lead times and technological and regulatory challenges make new nuclear, either in the form of Small Modular Reactors or large power plants, a longer-term solution. There is considerable momentum, as shown by Meta’s recent request for developers to provide between one and four gigawatts of new nuclear capacity in the US to power its AI data centres.

“The growth in electricity generation capacity will require significant capital expenditure and changes the long-held perception of electricity utilities, which may now be classed as ‘growth stocks’ for the next decade.”

Read the rest of this article in the January edition of Portfolio Adviser Magazine

The Alger Focus Equity fund posted a return over the year of 56.3%, while another of its strategies, the $564m Alger American Asset Growth fund, was up 52.39%.

While surging share prices in Nvidia and other US tech stocks on the back of AI have been among the largest contributors to performance over the last year, the Alger American Asset Growth fund is one of the few actively-managed funds to beat the S&P 500 over a 10-year period.

See also: Yearsley: Financials ‘surprise winner’ of 2024

Speaking to Portfolio Adviser, Alger CEO and CIO Dan Chung says that the firm’s long-term performance is down to a lot more than just holding Nvidia.

Chung is a named manager alongside Dr Ankur Crawford and Patrick Kelly on Alger American Asset Growth, while Crawford and Kelly also run the Alger Focus Equity fund.

“Over a long-term period, its not about a single stock. It’s hundreds of decisions every year, and sometimes the decision is not to sell,” Chung says.

“We were early in Nvidia, buying in 2022. After 2023 saw a spectacular rise in the stock, a lot of people were saying that it must be time to sell, without carefully understanding the fundamentals of the business and how early on we are in the AI revolution. Our biggest and best decision was not to sell any of our Nvidia stock at that time, and it remains a top holding.

“Over the longer term, the success of the strategy has been a relentless focus on the depth and the quality of our team. 60 investment professionals for a firm of our size is actually quite a lot.

“We have a concentration of analysts that is probably 2-3 times more than a lot of our competitors.”

See also: Artemis merges European funds

The firm’s investment approach seeks to benefit from what Chung labels ‘positive dynamic change’. Reviewing the performance of the Alger American Asset Growth strategy over the last 10 years, in which it has posted a 430.8% return (as of 7 January), he says it has been a period of immense change.

“That period started with coming out of the great financial crisis, before entering into the most radical changes in American politics in decades.

“Our relentless focus on our philosophy of positive dynamic change – it means that culturally, as an investment firm, we’re very focused on embracing change. Don’t be afraid of disruption, innovation and volatility. Instead, we look at it as an opportunity to look for the positives that come out of these changes.

“The world is changing faster. There is more innovation and more disruption, which means winners and losers are created faster than they were in the past.

“It’s a highly competitive game. It requires people, but it also requires that right philosophy and mindset.”

European growth

The New York-based boutique is a growth equity specialist, and though it is better known back at home, the firm is looking to expand its offerings in Europe.

“We only have about 5% of our clients internationally — we have a two-person office here in London and a one-person office in Singapore, and we’re trying to grow in both regions.”

“We have been interested in talking with European asset managers in a similar situation, whether we can partner to help them grow in the US, and help Alger grow over here.

“There are some very obvious advantages for a European asset manager to consider partnering with a firm like Alger. We can offer significant US distribution. I’ve met many firms here that are actually quite large and don’t really have any US distribution, and we don’t have significant European distribution. The opportunity is pretty large.”

Industry M&A

The firm, founded in 1964 by Fred Alger, recently celebrated its 60th anniversary.

Industry M&A has seen many boutique firms in both the US and Europe swallowed up by larger asset managers.

However, Chung says that this trend has led to the unique selling points of larger asset managers becoming distorted, which can be exploited by existing boutiques.

“We’ve been taking advantage of the industry structure right now. In traditional asset management, you have a few global giants, and then you have a lot of very big companies just outside of the top 10.

“A lot of them have been created out of multiple mergers. The challenge there is that they don’t have the distribution scale of the largest names, and because they’ve been created out of mergers, a lot of them are like supermarkets. They offer everything, but they’ve lost a little bit of what they are best at.

“They all originally had something that they were really good at, whether it was bonds, equities or real estate, but now that they’ve become these large ‘supermarkets’ – they’re trying to compete with the Costco’s and the Tesco’s.

“They have a lot of challenges because it’s hard for them to grow as they’re large already. Their cultures are just within the team of the investing, and they’re not necessarily particularly known to be particularly at any one thing.”

Now, another turn in truths may be occurring for the asset class, as the risk factors of corporate and government bonds begin to shift. According to Shaniel Ramjee (pictured), co-head of multi asset at Pictet Asset Management, bonds issued by corporates are currently “paradoxically safer”.

“A lot of corporates have managed their balance sheets very well. They’re not as leveraged as they have been in the past, and therefore the spreads that they trade out over and above governments are low, but they might stay low for longer periods of time because of the nature of a much more diversified opportunity set,” Ramjee said.

“These corporates aren’t as indebted as the governments, and by and large, we see less and less corporate bonds being issued versus government bonds being issued every week. The supply and demand of these two asset classes is different. So I think paradoxically, we’re in a period where government bonds are riskier than usual, and actually corporate bonds can be less risky than usual. And I think that’s an interesting difference today than we might have seen in years gone by.”

While the issuance of some corporate bonds has caused a bidding war among investors, government bonds from typically desired countries such as the US and UK are all too available for investors as they attempt to stimulate their economies.

Other countries with typically stable markets, like France, have been rocked by political uncertainty. French 10-year government bond yields currently sit above 3.4%, almost a percentage point above the 2.6% levels of last January. French yields now sit in line with the government bond yields in Greece.

See also: What does the gilt yield spike mean for UK bond prospects?

“Ultimately, these governments have borrowed a lot of money. They’re highly leveraged, and unfortunately, like we see in the UK, the propensity for these governments to want to come and borrow is very high. So the risk is that the credit worthiness of those countries are deteriorating, and no one wants to really think about reducing spending,” Ramjee said.

As of October 2024, the estimated UK government bond issuance for the 2024/25 fiscal year was £294bn following an expansion by Rachel Reeves during the Autumn Budget.

When markets opened on the day of the budget, the yield of a UK 10-year gilt sat at 4.27. As of market close on 6 January, the yield is 4.61. Year on year, yield has increased by 23%. In the last week, 30-year gilt yields hit their highest level in near three decades.

To Ramjee, this could be the beginning of a larger problem if the economy is not able to grow under the new fiscal policies.

“Particularly within the UK, we’re at a really high tax burden. But on top of that, what’s happening is that if you don’t grow the economy, the risk is that the government has to come back for more taxes in the coming years. And I think that’s the other element that markets are worried about, especially in UK gilts, is that the tax rises have not finished,” Ramjee said.

“That’s why it’s so important to have growth policies along with any other tax rises, because if you don’t have them, then the market will get more concerned that you’re not doing anything to actually to grow the economy. That’s what’s been weighing on the gilt markets to date.”

See also: Will bond yields stay higher for longer?

As the asset class shifts, Ramjee said its use in portfolio’s becomes less clear: government bonds in particular were traditionally seen not just as a diversifier against equities, but a way to manage levels of risk. Now, Ramjee said it can not be relied on as heavily for either of those reasons.

“Government bonds provided a good stabilizer in a portfolio. They provided income, but they also provided a diversifying effect. When equities went down, bonds went up, and that helped the overall balance of a portfolio.

“What we see now as those debt levels have risen, and as the risk in those government bonds has risen is that the correlations are no longer as good for multi-asset portfolios, so you can’t rely on them as much as you could before to give you that diversification. And I think that is worrying from a multi asset standpoint, that you have to rely on different types of assets to diversify you.”

Managers Ankur Crawford and Patrick Kelly built a concentrated portfolio of just 48 stocks, with much of its allocations focused on five tech companies. Tech behemoths such as Amazon, Microsoft, Nvidia, Meta, and Applovin account for the top 39.1% of the fund and drove most of its performance in 2024, according to its latest annual report.

These thriving tech giants were a source of high returns for many investors in 2024, especially Nvidia. Its soaring share price in recent years has made it a market darling, but Nvidia’s 179.2% increase in 2024 appeared mild compared to Alger Focus Equity’s fifth-largest holding, Applovin.

The mobile marketing technology company’s share price rocketed 751% last year, boosting the fund’s total return well ahead of other IA North America funds.

Alger Focus Equity has been a stand-out winner over the long-term too, boasting to be the fifth best-performing fund in its peer group since launching in 2019. Its total return of 193.7% over the period places it 80.3 percentage points ahead of the sector’s average return of 113.4%.

Other IA North America funds with an overweight in tech – and high allocations to Applovin – were also among the best performing portfolios of 2024. The Alger American Asset Growth and Lord Abbett Innovation Growth funds also delivered supercharged returns last year, climbing 50.6% and 45.9% respectively.

However, while US equity funds may have taken the top spots, it was portfolios in the IA Financials and Financial Innovation sector that delivered the highest returns on average. Funds in this group increased investors’ returns by 24.3% in 2024, whereas IA North America grew them by a slightly milder 22%.

The Janus Henderson Global Financials fund was the best performer in the sector, soaring 34.2% throughout the year, with Xtrackers’ MSCI USA Financials and MSCI World Financials ETFs following closely behind with returns of 22.6% and 29.1% respectively.

The sector benefited from high interest rates, reasonable economic growth and moderating inflation in 2024, as well as a surge in share prices following the re-election of Donald Trump in the US, who pledged to deregulate the sector.

Best performing sectors of 2024

Source: FE fundinfo

Nevertheless, investors did not need to look solely at financial funds or those exposed to tech-heavy US equities for the highest returns. The second-best performing portfolio of the year was dedicated to a more niche corner of the market – European emerging markets.

The JPM Emerging Europe Equity fund soared 53.9% throughout 2024 with a portfolio consisting mostly of Russian equities, which accounted for 67.7% of the fund’s assets.

Fairview Investing director Ben Yearsley speculated that this fund may have been another beneficiary of Trump’s victory, as the president-elect frequently vowed to force a resolution between Russia and Ukraine during his election campaign.

The best performing funds of 2024

Source: FE fundinfo

Another specialist fund to top the charts was the WisdomTree Blockchain ETF, which generated some of the highest returns in the Investment Association universe last year (up 44.5%) by investing in cryptocurrency technologies.

While prone to sharp turns in performance, crypto markets ended 2024 on a high as one of its leading currencies, Bitcoin, surpassed $100,000 for the first time.

This rally was again driven by Trump’s election victory, with the incoming president expected to take a more laxed approach to crypto regulation than the Biden administration. He has already appointed crypto advocates such as Elon Musk, Paul Atkins, and Howard Lutnick to influential positions within his new administration, who could influence Trump’s policy direction.

Additionally, the external fund manager will change. The £5.2bn fund had been run by Kirsteen Morrison and David Winborne at Impax Asset Management, but Schroders will take over as the fund’s sole manager going forward. The fund will also invest in Schroders’ Global Sustainable Growth and Global Value Equity investment strategies in order to increase the range of companies the fund can invest in.

According to St. James’s Place, the changes – which will come into effect from 24 February 2025 – will improve diversification and introduce a more balanced blend of investment styles, while maintaining the focus on sustainability, which is required to meet the FCA’s new higher threshold for sustainable investments.

See also: “EY: Investors display ‘worrying level of apathy’ to ESG“

Ongoing charges will be reduced by 0.01% as a result of these changes.

Justin Onuekwusi (pictured), chief investment officer at St. James’s Place, said: “The bar to be a labelled fund is very high and will help clients to better understand how their money is being invested in companies that aim to deliver a positive outcome for people and the planet.

“Schroders is a well-regarded expert of sustainable investing, with a diversified approach. They have depth of experience across different equity investment strategies, which can provide a more balanced blend of investment styles for the fund.

“We’d like to thank the team at Impax for their expertise, partnership and their key role in the success of the fund to date. We continue to see Impax as a leader in investing in the transition to a more sustainable economy and a key partner for us in the future.”

Alex Tedder, co-head of equities at Schroders, added: “This investment allocation by SJP underlines the quality of our active investment process and commitment to delivering sustainable outcomes for our investors.

“Clients, investors and the industry are increasingly focused on bespoke investment solutions that can deliver strong risk-adjusted returns together with a comprehensive commitment to sustainability. Our broad-based capability and commitment to active management puts us in a strong position to meet client objectives in a rapidly transforming investment environment.”

This article was originally published by our sister title, PA Future

The latest Man versus Machine report from AJ Bell showed that only 31% of active managers have outperformed a passive alternative in 2024. That’s consistent with the pattern over the past decade, where about one third of active funds outperformed their passive equivalent.

Unsurprisingly, active managers have fared worst in the Global and North American sectors, where they have struggled to match the pace set by the technology giants.

The market environment of recent years has unseated some of the best and most respected active managers, particularly those with a ‘quality’ skew to their portfolios. In mid-2024, Nick Train, manager on the Finsbury Growth & Income trust, admitted after a tough set of results: “We really should be able to do better than this and if we can’t, then I absolutely share shareholders’ growing impatience.”

Performance has improved subsequently, but it has been a tough period. FundSmith Equity has also had a tough run of performance, underperforming the MSCI World Index for four calendar years in a row.

Active funds have also had to contend with significant outflows. AJ Bell points out that retail investors have withdrawn over £100bn from active funds in the last three years. Over the past decade trackers have gone from 10.5% of the UK market, to the current level of 24%, growing from £93bn to £359bn.

See also: Analysis: The key questions for asset allocators in the year ahead

Laith Khalaf, head of investment analysis at AJ Bell, said: “Active managers aren’t just suffering in terms of performance relative to their passive peers, they’re losing the battle for flows too. The last three years have witnessed an unprecedented rout for active managers in terms of fund flows.

“Since the beginning of 2022, £105bn has been withdrawn from active funds and £48bn has been invested in passive funds, based on AJ Bell analysis of Investment Association data. The exodus from active funds shows only the most minimal signs of abating, with 2024 withdrawals on course to come in just below those of last year’s record-breaking outflows.”

There have been brighter spots. In Global Emerging Markets funds, for example, 48% of managers have outperformed passive options over five years, with many active managers swerving the problems in China, while passive funds were forced to participate fully in its weakness.

Europe has been another relative bright spot, with 47% of active managers outpacing passives over five years. This may be because weak funds in Europe have not survived.

There is a question over how long this passive dominance can continue. If the US market is a guide, there may be further to run. in the US, the value of assets in passive funds overtook active funds for the first time last year, with more than 50% of the market now managed passively. Khalaf said: “It sets a meaningful roadmap of where the UK investment industry may end up. In other words, don’t bet the house on a revival in active management anytime soon.”

This is a depressing conclusion for active managers, but also for investing in general. It means that capital is allocated on the basis of size rather than merit and may see investment moving towards those parts of the market that need it least.  

It may also be problematic for investors in the longer term. Dan Brocklebank, UK head at Orbis, said: “Global markets are increasingly concentrated in a few large, US-based companies. Investors in global tracker funds are thus becoming more dependent on the performance of a small number of companies.

“Similarly, many large active funds have high exposures to these same names, resulting in high correlations between the largest funds. This makes achieving true diversification difficult.”

What might change the dominance of passive? The most obvious trigger would be a wobble in the technology sector. The gloomy prognosis for active managers assumes that markets continue much as they have for the past decade.

There is no guarantee of that, particularly given the shift in the interest rate environment. History suggests that when markets hit this level of concentration, the reversal can be abrupt and uncomfortable. This may prompt investors to rethink their allocations to passive.

A better performance from smaller companies would certainly help active funds in certain markets. In the UK, for example, active managers tend to have higher allocations to small and mid-cap companies, and their weakness has been a persistent headwind. There are tentative signs of a shift in the outlook. UK-focused equity funds saw their first inflows in 42 months in the month after the budget, according to Calastone.

See also: CIOs name trade wars and concentration risk as 2025’s top concerns

Paul Marriage, manager of TM Tellworth UK Smaller Companies Fund at Premier Miton, said other factors could change the outlook for smaller companies in 2025.

“The chancellor’s Mansion House speech was a good opportunity to change the narrative post budget and her proposals to encourage UK equity investing are helpful, if lacking in detail,” said Marriage. “We expect the first long term asset funds (LTAFs) to start allocating to UK smaller companies in the first half of 2025. These are a very welcome new buyer to the market.” Buybacks and continued M&A could also support the sector.

ESG factors could be another consideration. Active managers are in a better position to ensure strong governance, challenge underperforming management teams, and hold companies to account on environmental or social risks. However, it remains unclear whether investors are willing to pay a premium for it.

Richard Toh is likely to remain an outlier, with most active managers holding out for a change in the unusual environment that has prevailed over the past decade rather than opting for a dramatic mea culpa. Nevertheless, for the time being, active managers remain under pressure.

This story originated on our sister title, PA Adviser.

Meanwhile, the 10-year gilt has risen to its highest level since the great financial crisis.

The spike has led to concerns over the state of public finances, particularly following chancellor Rachel Reeves’s tax-raising Budget at the end of October. However, Laith Khalaf, head of investment analysis at AJ Bell, says that placing the blame solely on the chancellor is “probably wide of the mark”.

“Reeves’ maiden Budget was marginally inflationary, and did increase overall government borrowing, but since the beginning of October the US and UK 10-year bond yields have tracked upwards almost hand in hand.

“Those who think the current bout of bond market jitters is down to policies announced in the Budget need to explain why there has been such correlation in the upward march of bond yields both here and in the US.”

See also: ARC: Inflation leaves private portfolios 12% below 2021 levels

Fidelity International portfolio manager Mike Riddell agrees that the upward trend is mainly a global fixed income story.

UK gilt yields have moved broadly in line with US Treasuries over the last few months, while Riddell also points out that there has been a similar sized move in long dated German government bonds in the last month.

“That’s not to say that the UK has been immune to pressure,” he says. “Although there’s not any sign of a UK crisis yet, a worrying development in recent days is that gilt yields have risen a little more than in other markets, at a time when sterling has sharply weakened. 

“Normally currencies are driven by interest rate differentials, where higher gilt yields relative to other countries would be expected to push the pound stronger. The combination of a weaker pound and higher relative gilt yields has eerie echoes of August-September 2022, and if this continues, could potentially be evidence of a buyer’s strike or capital flight. 

“What’s been interesting about the global bond market moves of the past few weeks is that this is an unusual ‘bear steepening’ move, where longer dated bond yields have risen by more than short-dated yields. These moves are indicative of fixed income investors becoming increasingly concerned about fiscal largesse, and all the government bond supply that accompanies it. 

“It’s not about inflation concerns, where the market’s medium term inflation expectations are little changed since the beginning of November. Investors are instead demanding a higher risk premia or ‘term premia’ to compensate them for owning longer dated government bonds.”

Buying opportunity?

Among the implications of the gilt yield moves, refinancing debt has become more expensive.

“If this selloff continues,” Riddell adds, “it’s going to push deficits wider over the long, which then risks a doom loop since deficits need to be funded by ever more sovereign issuance. 

“But it’s also bad news for corporate issuers, or for example anyone who wants a fixed rate mortgage – a jump higher in the risk-free rate is a tightening in financial conditions, which will dent global economic growth. So if sovereign borrowing costs continue to surge higher, then risk assets such could start to come under substantial pressure.

“But the positive news it that the potential return from owning government bonds has just got a lot higher too. If you buy a 30-year UK government bond today and hold to maturity, then assuming no default of course, the total return over the life of the bond is almost 400%.” 

Richard Carter, head of fixed interest at Quilter Cheviot, says that gilt yields present an attractive opportunity for long-term investors.

“Despite this turbulence, gilt yields still present an attractive opportunity for long-term investors. Currently, they are well above expected inflation levels, making them a viable option for those looking to secure returns in a sluggish economy that might prompt further rate cuts by the Bank of England.

“For investors with a lower risk appetite, short-dated gilts still offer a promising avenue and are less sensitive to market fluctuations.”

It is a truth universally acknowledged, that investors in possession of a good fortune must be in want of a tracker fund. But not, it seems, in the single most popular equity market—the US.

Over 12 months to the end of November, UK investors have put £21.3bn to work in Equity US mutual funds and ETFs. Given current market trends, you might expect the lion’s share of this to be going into passive vehicles. That’s not been what has happened, however. Although certain passive products have done well from the trend to US equities, in the round only £167m of that cash has gone to trackers. The rest is all active money.

See also: Morningstar: Time to look beyond the US

Before continuing, however, a slight caveat: to complicate things, if you look at London Stock Exchange-listed ETF trades, things are a little different, with November flows to the classification spiking to new highs. On this metric, net flows were almost £14bn — or 244% of the last high, which was hit in October. But this will also include flows from other exchanges on which the ETFs are listed, so is a less UK-focused view. For whatever reason, a view across the UK mutual fund and ETF landscape gives a stronger active slant.

Monthly flows to Equity US funds, active versus passive, Dec 2022-Nov 2024, £bn

Source: LSEG Lipper

As you can see from the chart, Equity US fund flows pick up from October 2023 lows, and have remained positive, except for this September.

Why this should be is harder to fathom: the US is the world’s largest, most liquid and best covered market. It should, therefore, be the hardest place to add value through active management. It seems that those with the deepest pockets think differently.

I looked at the seven active funds that have attracted £1bn-plus over the past two years, to see what distinguished them. The obvious question is, have they delivered? That’s a hard one to answer, as five of the seven have been launched within the past year. The other two haven’t been around long enough to get three-year histories. However, net returns over 12 months are within a few basis points either way of the total return for the S&P 500 over the period.

See also: Trump tariffs: A looming disaster for the global economy?

The main driver of active to passive is, of course, cost. Only one of the seven has a Total Expense Ratio above the average for Equity US passive funds, and most are substantially lower. Given their high initial minimum investment levels, which strongly indicate institutional, that’s not too surprising.

So, we can safely say that investors are not buying into the record of the fund; they are buying the asset manager and the approach. In terms of the former, one is clearly dominant (no clues, but no prizes for guessing either), there being only two management companies over the seven funds.

Then there is the approach: five out of the seven carry ‘ESG’ in the name, while the other two have well-promoted sustainability-based exclusion policies. Flows to LSEG Lipper Research’s sustainable fund list shows a £17.8bn to relevant Equity US funds over the period: less than to the net flows for active funds, and less than to the top-seven money takers, but still well ahead of conventional peers.

To what degree each of these factors — active management, company reputation and sustainability policy — are driving flows cannot be determined from the raw numbers alone, but that these three stand out from the data cannot be coincidental.

But as US equites leap to new heights, some asset managers grow concerned that a bubble is forming and better opportunities can be found in cheaper markets elsewhere.

Share prices in the US are trading at a lofty price-to-earnings ratio of 26.3 (as of 30 September), which is considerably above some other equity markets around the globe.

“The most attractive developed market”

It is for this reason that Morningstar’s chief research and investment officer Dan Kemp is taking some focus away from the steep US equity prices and looking towards the relatively undervalued European market.

“After their rally earlier this year, the valuations for US stocks now appear expensive based on our models and top-down expected return estimates,” he said. “By contrast, Europe, and in particular the UK, stands out as a region where investors can achieve better risk-adjusted returns.”

The region’s rising GDP, falling inflation, and lowering interest rates makes it “the most attractive developed market” to invest in currently, according to Kemp.

He estimates that European equities are trading at a 5% discount to their fair value, which is “not cheap, but equally not expensive given where markets have traded over the past few years”.

To find truly cheap opportunities in Europe, Kemp said investors should look to small-cap companies, which are trading at a hefty 40% discount to their fair value estimate. This is where the “significantly greater value” in Europe lies, he said.

Maximising income

Fund managers chasing high returns in the US has also slashed the level of income that investors can earn on their savings, according to Van Lanschot Kempen’s head of the dividend and value team Joris Franssen.

He said 70% of global income funds now have exposure to the magnificent seven stocks – none of which offer a dividend yield above 1%.

“Over the past five years or so, the median yield of global dividend funds has taken a notable tumble, partly due to the fact that many strategies have shifted towards the US,” Franssen added.

“As equity markets reach extreme levels of market concentration, diversification becomes even more important. Valuations are currently more attractive, and yields are higher, outside the well-known US large-cap names.”

To find higher yields and lower prices, Franssen has looked past the US and towards Asian equity markets for new opportunities.

He highlighted Japan and South Korea as two hotspots in the region that are “unlocking significant value” for investors, namely due to the corporate governance reforms that are transforming their equity markets.

Heightened demand in emerging markets

The chasm between US valuations versus the rest of the world is prevalent across different asset classes too. Emily Foshag, manager of Principal Asset Management’s Global Sustainable Listed Infrastructure fund, said she has been allocating away from the US and towards more affordable holdings across the globe within her sector.

“Our view of relative valuation is generally driving us to express a preference for investments outside the US,” Foshag added. “We see infrastructure companies with comparable or even stronger fundamentals trading at material discounts to their US counterparts.”

Foshag underlined emerging markets as not only an area with lower starting valuations, but also much higher growth opportunities.

Rapid urbanisation, population growth, and government-led initiatives to improve infrastructure makes the structural trends there all the greater than developed countries.

Foshag added: “We are seeing meaningful valuation discounts in places like China or Latin America that have the potential to revert over the medium-term.

“More generally, a globally diversified infrastructure portfolio not only reduces reliance on US market performance but also provides a return opportunity that historically exhibits lower correlation to broader global equities.”

In the financial world, we often focus our attention on trying to understand the impact these events may have on a particular asset class. While the impact on portfolios takes up much of the conversation, the logistical challenges for asset managers in responding to market-moving events is not often discussed.

So, what are some of the logistical challenges asset managers face leading up to, and in the wake of, a market-moving event?

See also: The key questions for asset allocators in the year ahead

Sam Idle, consultant at Clearwater Analytics and former head of client reporting at M&G, says that one of the biggest problems for asset managers around major events is being able to access up-to-date data so soon after month-end.

Asset managers often get hit by waves of client requests for information in response to such events.

Idle says that the response is more straightforward when results are widely expected – such as Labour’s election victory earlier this year, which had been widely forecast beforehand. This allows asset managers to be better prepared for the data requests they may receive.

However, Idle says that challenges arise when something happens that is unexpected. “This was a big thing we had at M&G with Brexit,” he says. “When the Brexit result came in, the FTSE tanked and everyone was trying to work out their exposure to the UK.

“We had done all this work in advance and we were sat there feeling quite smart, firing out these reports. Then at around lunchtime, the FTSE bounced back, and the DAX took a tank.

“No one had ever thought to do the same reports for Germany. So all of a sudden, our client service teams were getting phone calls from clients saying, “I get that you sent me this on the UK, but what’s now happening on the DAX? What’s my exposure to German government bonds?’

“We didn’t have that information to hand, and we were struggling to get that because of the proliferation of data sitting in different places.”

Types of request

In terms of the types of requests received, Mirabaud Asset Management’s head of UK wholesale Benjamin Carter says: “Essentially, we receive two types of requests: unique, ad-hoc requests from a client — such as for specific data — which we deal with on a one-to-one basis; and key topics of interest such as responses to events which will be communicated to a number of clients.

“We will often try to pre-empt these to ensure a quick response, gathering information from our subject matter experts and preparing a communication for distribution to all relevant regions. We find that a culture of sharing client feedback and insight across our Sales teams is very helpful in understanding and anticipating what clients will be looking for.”   

Idle says that while technology and the availability of data is improving around this issue, he feels that more can be done to improve the technology around asset managers’ response in reporting.

See also: Euro vision: What Europe’s valuation discount means for investors

Jeremy Katzeff, head of buy side solutions at GoldenSource, adds that advances in data management technology have been transformative to the way asset managers respond to almost all client requests surrounding major geopolitical events over recent years.

“Most external requests ultimately come down to clients seeking specific data – whether it’s insights into market volatility, detailed analysis of sector-specific impacts, or updates on global asset allocations.

“Firms farther along in their digitalisation journey are usually equipped with more sophisticated data management infrastructures and interfaces, enabling them to centralise, normalise and standardise a vast array of investment data from right across the organization. This helps provide clients with quick and easy access to the information sought, even in real time.

“It is typically the larger asset managers that boast these capabilities, but smaller, boutique players are increasingly looking to bolster their data warehouses as enterprise data solutions continue to become more accessible and scalable, thanks to advances in areas like cloud computing.” 

Mirabaud’s Carter believes that a boutique structure can help to communicate with clients more efficiently.

 “The temptation is to think that it’s harder for boutiques to respond, with fewer sales and marketing professionals, but I’ve found it more efficient because there is real focus. The smaller teams are very dynamic, and they are not weighed down by packed schedules of standard reporting and planned content with no room to divert resources quickly.

“While it’s true that we do not have a large team of writers to turn to, we focus instead on thought-provoking, quality output.”  

US allocation

The concentration in US markets has reached all-time highs. The US is now 74% of the MSCI World index. All top 10 holdings are in the US. The S&P 500 has 34.8% in its top 10 constituents, the highest on record. The Nasdaq 100 has over half of its market capitalisation in just 10 stocks.

Those stocks will be familiar – Apple, Nvidia, Alphabet, Amazon, Meta, Tesla and so on. On most measures, they look expensive. Apple has a P/E ratio of 41x, double its level in early 2022. It is worth noting that revenue grew by just 6% in the last quarter. This is no Nvidia. Even non-technology stocks are expensive – Costco, for example, trades on a P/E of about 60x. This is, above all, a large-cap phenomenon, and has been supported by passive inflows, which have continued throughout 2024.

There is nothing to suggest this is about to collapse – AI appears likely to be a revolution every bit as important as the internet. However, Ben Leyland, manager of the JOHCM Global Opportunities fund, said advisers need to reframe the question away from ‘should I sell because it’s too expensive’, adding: “The real question is how much of your clients’ wealth do you want to put there. Do you want portfolio returns to be so dominated by a single bet? How confident are you?”

At the very least, advisers need to know whether their asset allocators are considering diversifying within the US market. Are they looking to smaller companies, for example, or to alternative sectors beyond technology? Financials and utilities have been the stand-out success stories of the year, but form a far smaller share of the index.

Allocation to alternatives

Karen Ward, chief market strategist for EMEA at J.P. Morgan Asset Management, said investors face a more challenging diversification problem than during the pre-pandemic period. Back then, equities provided capital growth in good times, while government bonds rose in value when recession hit and central banks cut rates.

Bonds can still provide effective diversification to equities at times of weak market confidence and potential recession. This was seen over the summer, with bonds providing protection as equity markets sold off on recession fears.

See also: Trump tariffs: A looming disaster for the global economy?

Higher yields also protect against an inflationary shock. “If 10-year government bond yields were to fall by 100 basis points over the next 12 months, they would deliver a return of more than 10%,” said Ward. “This performance would provide the kind of meaningful diversification against equity losses that multi-asset investors rely on when constructing balanced portfolios.”

However, they won’t protect against inflation shocks. That remains a potential problem for the year ahead, as president-elect Donald Trump’s tax cutting, deregulation, and tariff agenda comes to the fore. Ward added: “We expect that over the medium term a more fragmented global economy – and the potential for fiscal misbehaviour – will give rise to more inflationary impulses similar to those experienced in 2022. In this case, fixed income assets might be expected to experience a sell-off at the same time as stock prices are falling.”

Ward suggested an allocation to alternatives such as infrastructure, property and even hedge funds could be considered in this environment.

Fixed income allocation

There are mixed messages on inflation. On the one hand, the assumption is that Trump’s policy agenda will be inflationary. On the other, there are signs of real fragility in some global economies, particularly in Europe where growth continues to weaken. Even in the US, inflationary factors, such as government spending, excess savings and the wealth effect, are likely to dissipate.

Julien Houdain, head of global unconstrained fixed income at Schroders, said: “The key issues on the US political agenda, including stricter immigration controls, more relaxed fiscal policy, fewer regulations on businesses, and tariffs on international goods, suggest a growing risk. These factors may halt any improvement in the core inflation figures and could cause the US Federal Reserve (Fed) to cease easing monetary policy earlier than expected. In other words, we see a no-landing risk rising, a scenario in which inflation remains sticky, and interest rates may be required to be kept higher for longer, though it’s not our base case.”

A lot will depend on whether Trump’s rhetoric is matched by action: “The pace, scale and sequencing of these different policies will play a critical role in steering the direction of the markets,” he said.

Nevertheless, Houdain said bonds look cheap versus alternative assets, with current yields higher than that of the expected earnings yield on the S&P 500. It is relatively difficult to find fixed income managers that are long duration, with many preferring not to have interest rate sensitivity in their portfolios given the uncertainty.

Exposure to unloved assets

Areas such as China and the UK have been widely overlooked by asset allocators over the past two years. Both are starting to see a revival. China’s stimulus package has seen the Shanghai Composite revive since November, while the UK markets have been supported by merger and acquisition, plus buyback activity.

Mark Costar, senior fund manager of the JOHCM UK Growth fund, said: “We keep coming back to the UK because there are world-class disruptive businesses here that have really strong structural growth optionality, but they’re trading at table-thumping discounts.”

See also: Macro matters: US debt crisis looms

Costar said his strategy has received multiple bids for UK stocks this year, including two at triple-digit premiums. This suggests international private equity and corporate buyers believe the UK is undervalued. There are still concerns over UK economic growth, and the direction of travel for government policy, but the UK could claim to have more political stability than, say, France or Germany.

Gervais Williams, manager of the Diverse Income Trust at Premier Miton Investors, believes that large caps may not be able to dodge “the radically changing economic and political bullets. Clearly, quite a few small caps might get caught out as well. But there will be others that don’t just survive better but also happen to be in exactly the right place at the right time and deliver quite exceptional returns”. 

For China, there are concerns that the stimulus does not do enough to support the country’s flagging property markets or support consumer confidence. However, there may be more stimulus ahead, particularly if the Chinese government decides it needs to do more to support growth in the face of US tariffs. The Chinese markets still look cheap relative to their international peers.

It is entirely possible that 2025 ends up looking exactly like 2024, with AI taking off and the magnificent seven – or whatever acronym emerges for big tech – leading the way. However, there are a range of factors that could disrupt this pattern in the year ahead, and asset allocators will need an alternative strategy.

This article first appeared on our sister publication, PA Adviser

This is in spite of real yields and the US dollar remaining high, usually negatives for gold. But with a notable wobble over the past few weeks, could the party be about to come to an end?

Gold remains relatively lightly used among discretionary fund managers. The quarterly ARC Market Sentiment Survey found that 75% of managers had either no gold exposure or less than 2.5%. No manager had exposure above 10%. 

See also: IIMI urges launching boutiques to consider corporate structure

However, Graham Harrison, chairman at ARC, said: “An investigation of the changes in net sentiment over time displayed by discretionary investment managers to gold reveals a strong correlation with the performance of gold over the previous 12-month period.”

This pattern suggests discretionary fund managers could be about to turn more positive on the asset class. Equally, while the gold price has run up a long way, there are still supportive factors for gold.

George Lequime, manager of the Amati Strategic Metals fund, said: “The big driver in the past two or three years has been a massive pickup in central bank buying. Partly that’s been related to heightened geopolitical tensions, especially in the Middle East and Ukraine. Central banks in countries such as China, Turkey and India have increased the level of gold in their reserves.”

This is still happening. In its latest report, the World Gold Council said central bank buying slowed in the third quarter, but demand remained robust at 186t. Year-to-date central bank demand reached 694t, in line with the same period of 2022. Geopolitical tensions continue to be acute, and may accelerate with a new Trump administration starting in January. This should support demand.

Another factor to consider may be the incoming US administration’s tax, tariffs and deregulation agenda. The consensus is that this may be inflationary. Gold is often seen as an inflation hedge, though the strongest correlation has been during periods of hyper-inflation when investors start to have real fears over the value of their savings.  

Nitesh Shah, WisdomTree’s head of commodities and macroeconomic research, said that until recently investors had come back into gold exchange traded commodities (ETCs) after close to two years of selling between May 2022 and May 2024.

“Since May 2024, there have been approximately 3 million troy ounces of flows into ETCs (i.e. a 3.7% increase), worth $7.8bn (using gold prices as of 10/10/2024),” said Shah.

However, there are also reasons for caution. On the negative side, the gold price has moved a long way, and investors appear to be growing increasingly cautious. The uptick in ETC interest reversed in November, when they saw outflows of $2.1bn. This may have been the Trump effect, which brought a surge in demand for ‘risk on’ assets such as bitcoin and the dollar, but it still should give investors pause for thought.

See also: Analysis: Is the end of the magnificent seven nigh?

The appreciation in the dollar is particularly worrying for gold bugs. Although WisdomTree believes dollar depreciation pressure is already pent-up – and Trump himself has said he wants the dollar to fall – that is not the early signs from the market. The twin deficits should already been exerting pressure on the dollar, but it remains stubbornly strong, and this could continue if Trump enacts his agenda.

If, as is widely expected, the Federal Reserve cuts rates again, and real yields drop, this would be bad for gold. While Trump’s policies are expected to be inflationary, he has seen how the US electorate treated the last administration that presided over ever-higher inflation and may curb his ambitions for, say, tax cuts.

Gold produces mixed feelings from multi-asset managers. David Coombs, head of multi-asset investments at Rathbones, had been holding gold through the iShares Physical Gold ETF, but has been selling it down as the price has risen.

“The yellow stuff hit a record high of $2,787 a troy ounce in October and has remained elevated since. In context, that’s 35% higher than where it started the year and 84% higher than the eve of the pandemic,” he said.

He said while it can be useful to hold a small allocation as insurance against periods of weakness in financial markets, he sees better value in government bond markets and believes locking in yields of 4-5% before the Fed cuts rates again makes more sense.

“Markets that price future interest rates give a 75% chance that the Fed will cut by 25 basis points again when it meets on 17-18 December,” Coombs added.

Rob Burdett, head of multi manager at Nedgroup Investments, is more comfortable with holding gold, saying it still has favourable demand/supply characteristics, can offer diversification and has the potential to offset geopolitical and inflation risks.

WisdomTree’s internal gold model has a forecast of $3,030 for gold by the third quarter of 2025, assuming the consensus economic forecasts hold true. In a bull case, where inflation remains relatively high, but the Federal Reserve continues to cut rates, gold could reach $3,360/oz. In a bear case, where the Federal Reserve doesn’t cut, or even raises rates, gold could fall back to $2,440/oz over the same period.

Amati’s Lequime pointed out investors do not have to buy the gold price. Gold mining companies are, in his view, as cheap as they have been in his lifetime in spite of the rising price. This is particularly true for small and mid cap mining companies. They would usually outpace the gold price, but instead have lagged.

See also: Will bond yields stay higher for longer?

He said: “It’s because we’re fighting against other asset classes that are doing well. The million dollar question is what’s going to take for capital to come back into the sector? And partly, you need other asset class to really underperform and for there to be a pull back in the broader markets.”

After a year in which equity markets have soared, but been led by a narrow range of expensive technology companies, a pull back of this kind is not implausible. It’s been a good run for gold, but predicting its trajectory from here is considerably tougher.

This article originally appeared in our sister publication, PA Adviser