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

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.

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.

Many funds in the IA Targeted Absolute Return sector put capital preservation centre stage, sharing the ultimate goal of delivering positive returns in all market conditions. This presents an appealing prospect for many investors, yet the sector has been brought into disrepute by poor performance from its flagship fund – abrdn’s Global Absolute Returns Strategy (Gars).

The strategy held a colossal £53bn in assets under management (AUM) at its peak in 2016, but dwindling returns in the ensuing years led it to close down in 2023 at just £1.4bn. The sector as a whole has suffered consecutive monthly outflows since April last year, losing £2.5bn in total over the period.

But Mike Pinggera, head of multi-strategy at Sanlam Investments, says that “while the sector suffered reputational damage in the wake of Gars, it would be a mistake to write off its potential entirely”. Some tiny funds have continued to deliver strong returns despite investors withdrawing cash from the sector en masse, yet remain relatively overlooked compared with their larger peers.

VT Woodhill UK Equity Strategic

Fund size: £29m

VT Woodhill UK Equity Strategic’s AUM of just £27m seems minute when measured against the £545m of an average IA Targeted Absolute Return portfolio. But despite its small size, a total return of 27.4% over the past three years was far greater than the peer group’s 10.1% gain during the period – although it should be noted that the sector is highly diverse and so sector comparisons are not foolproof.

Manager Paul Wood invests in UK companies he deems able to “protect investors’ capital when the market falls, and add value as it rises”.

Top holdings include British stockmarket staples such as Shell, AstraZeneca and HSBC, which together account for one-fifth (20.4%) of the 58-stock portfolio. These shares also pay reasonably high dividends, contributing to the fund’s overall annual dividend yield of 3.9%.

Its capital-preserving strategy has certainly proved effective, delivering positive returns on investors’ savings in 26 of the 36 months throughout the period. In poor market conditions, it also protected capital against the worst downturns with a max drawdown of just 2.6%..

These characteristics could give portfolios some much-needed protection in coming years if markets remain volatile, according to Pinggera. “As we move into an era of heightened market volatility, interest rate uncertainty and changing economic conditions, absolute return strategies offer a compelling way to navigate these challenges,” he says.

“While the past performance of some funds may have disappointed, today’s investors should evaluate absolute return strategies within the context of modern markets where volatility and risk management are more important than ever.”

Polar Capital Global Absolute Return

Fund size: £77m

Another fund that has delivered strong returns during the past three years while also protecting against downturns is Polar Capital Global Absolute Return. It is up 20.3% over the time frame after doubling the 10.1% return made by the average IA Targeted Absolute Return fund.

Managers David Keetley and Stephen McCormick have run the fund since it launched at the end of 2018, building a portfolio of 50-100 positions across asset classes and regions worldwide. Most of its long equity exposure comes from the US, making up 34.7% of this sleeve of the portfolio.

Pinggera notes that while the downfall of funds such as Gars “undoubtedly shook confidence” in absolute return strategies that ultimately “tarnished the reputation of the sector” as a whole, portfolios such as this one are well worth revising.

“The lessons learned from past missteps, combined with improved transparency, risk management and a dynamic economic environment, suggest the sector is well-positioned to offer value to investors seeking diversification and uncorrelated returns,” he says.

“For those seeking an all-weather investment strategy, it might be time to take another look at the IA Targeted Absolute Return sector.”

M&G Global Target Return

Fund size: £58m

One tiny outperformer that may have gone unnoticed is the M&G Global Target Return fund. It climbed 18% over the past three years, outshining the peer group average by 7.9 percentage points, despite being just £58m in size.

Manager Tristan Hanson and deputies Craig Simpson and Aaron Powell invest in different asset classes around the world, with UK government bonds making up the top 17.3% of the fund.

This article originally appeared in the December issue of Portfolio Adviser magazine

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

Investors are on edge, grappling with uncertainty on multiple fronts as the US election fast approaches. With the outcome seemingly hanging in the balance, the potential impositions of blanket tariffs from a Trump presidency on all trade is concerning many. Such a move could spell trouble for the global economy, bringing potential implications for long-term geopolitical stability and fiscal discipline.

One significant tail risk we are monitoring is the impact of the US fiscal balance sheet. At around 4%, treasury yields are not overly concerning, but they reflect some uncertainty. While we do not anticipate a UK-like event in the US — a major bond sell-off akin to the Truss mini-budget moment — continued volatility in the bond markets leading up to and potentially beyond the election is likely.

While it is notoriously difficult to predict election results, and therefore subsequent policy of future administrations, the possibility of a Trump presidency focused on additional fiscal expansion and deregulation could push inflation higher, raising the yield of long maturity bonds as investors price greater long-run uncertainty in US bond markets. This ripple effect could inevitably be felt across the broader global bond market, as the US remains the benchmark for global fixed income.

See also: Morningstar: What does the US election mean for investing in China?

The potential imposition of blanket tariffs by Trump is especially concerning. While this could give a short-term inflationary boost to industries such as traditional energy, financials and defence, it could be disastrous for global growth over the long term. Take tariffs on China as an example. These have already led to a decline in US-China trade over the past few years and increased trade deficits with other countries. This rebalancing effect of blanket tariffs on US trade partners would complicate global trade dynamics.

The US economy has been sending mixed signals in recent months. The challenge lies in the core components of inflation, which seem inconsistent with the cut of over 1% the market expects from the Federal Reserve in the next 12 months. This creates a dilemma for the Fed, which must balance lowering inflation with a strong but potentially weakening labour market.

Historically, equity markets have shown more volatility during close and contentious elections. Given polling data indicates a tight race hinging on a few swing states, such uncertainty could spur heightened market volatility as investors react to polling trends and shifting political dynamics. While markets tend to calm after an election, investors should not assume smooth sailing in the immediate aftermath.

Policy changes, particularly those related to fiscal spending, taxation and regulation, could significantly impact sectors such as technology, energy and healthcare. leading to heightened market volatility as investors react to polling trends and shifting political dynamics.

Despite the noise, investors should remain steadfast: focusing on long-term fundamentals and preparing rather than predicting. Forecasting market responses to elections or economic data is fraught with risk. But discipline is needed — diversifying portfolios, managing risk and avoiding overreactions to short-term market moves.

While the election presents both short-term risks and opportunities, in line with past elections it is unlikely to have an impact on the medium-term expected returns of asset classes, but will stir potential short-term challenges.

While global bond yield curves may steepen globally pushing up longer term interest expectations, bonds remain an attractive asset class to hold with fears remaining around economic growth. We may also see volatility in equity markets as traders react to each other post-election, focus should be on the medium-to-long-term fundamentals — such as earnings and the discount rate — that will drive equity returns and ultimately client outcomes.

See also: Weekly Outlook: US election, UK and US interest rate decisions

Currency markets are also an area that may see volatility, especially if election results are delayed in swing states. However, we see little immediate threat to the US dollar’s status as the world’s reserve currency. Despite speculation, neither the euro nor renminbi are poised to replace the dollar.

Investors therefore should assess any risks within their portfolio and ensure they are resilient to adverse outcomes, while remaining flexible to seize opportunities that may arise during periods of extreme market stress.

Whether we face a Trump 2.0 presidency with potentially higher inflation or a Harris-led government which would likely be more of a continuation of the current administration, it is important to ensure that portfolios are diversified and robust.

By maintaining a disciplined, medium-term view and avoiding being swayed by the noise, investors can navigate the election with confidence, focusing on fundamentals rather than short-term volatility.

This article was first seen in our sister publication, PA Adviser

Yet one piece of the States’ future seemed set in stone long before the next president was elected: US debt would rise. Under Trump, debt is expected to grow by more than £7.5bn. As of October, it had ballooned to over $35.85trn (£28.35trn), and in the past decade, US debt has grown by almost $18trn.

While mounting US debt has been a perennial topic of discussion, there has been little in the way of consequences so far. The country hit its debt ceiling in January 2023, and in June of that year, lawmakers opted to suspend the debt ceiling until January 2025. Raising or suspending the ceiling is far from an uncommon practice for the US government: since 1960, it has been increased 78 times.

Gradually, and then all at once

How long this trend can continue, and when consequences will arise, is unclear to most investors. Some believe the timeline could be around a decade. Rob Perrone, investment counsellor at Orbis Investments, says this is the nature of how debt issues occur on most scales: gradually, and then all at once.

“The way governments get into debt trouble is similar to bankruptcy,” he explains. “How do you go bankrupt? Gradually, then suddenly. Nobody rings a bell when you start to get into debt trouble, it builds up, and then things start to fall apart.”

By the end of the fiscal year 2023, the US-debt-to-GDP ratio was 97%, according to the Bureau of the Fiscal Service. It is now estimated to be around 100%, projected to grow to 120%. Perrone says the issue lies in how debt can spiral. This happens as governments issue additional bonds to “plug the gap” of the debt, but it grows as interest rates come into play.

See also: Macro matters: The Mexican wave

“At the moment, the US government is paying 3.3% interest service cost on the debt they have already. The entire treasury curve is above that. So, whatever they’re issuing – five- , 10-, or 30-year debt – just to roll over the existing stock of debt is going to attract a higher interest rate,” Perrone adds.

“You have the debt pile getting bigger and the interest rate on new debt is higher than the rate on old debt. The US is already in a position where net interest on the debt is consuming more than the entire defence budget. It’s already bigger than the primary deficits they’re running on actual spending, and it’s projected to get worse.

“As a result, debt power gets worse which means the interest expense gets higher. Interest expense chews up more of the budget, which makes it even harder to balance the book, so your deficits get worse. This means you have to issue more bonds, issue more debt, and now your debt gets worse, and so on.”

This year, debt interest alone is estimated to be 3% of the US GDP. According to research by Pictet, interest deficits will make up over 60% of the federal debt by 2028.

Read the rest of this article in the December issue of Portfolio Adviser magazine

Political uncertainty also remains a major headwind in Europe. In the same week as the US election, the German coalition government led by Olaf Scholz fell apart with a snap election scheduled for February 2025. It follows similar instability in France.

From a stockmarket perspective, the Stoxx Europe 600 index has also underperformed the S&P 500 by 20% this year – one of the widest gaps on record.

See also: Pictet: Why investors need to rethink their Europe allocation

The S&P 500’s outperformance has further increased its valuation premium relative to the MSCI Europe ex UK index which, according to Karen Ward, chief market strategist for EMEA at JP Morgan Asset Management, prompts the question: is the discount on European stocks justified, or should investors consider reallocating towards the undervalued opportunities on the continent?

“Despite a new US president with an ‘America first’ agenda and Europe’s sluggish recovery, there are still strong reasons to diversify equity allocations regionally,” she says. “While the S&P 500’s earnings are expected to grow strongly in 2025, European earnings forecasts are more modest. European stocks also trade at a much lower multiple on these more reasonable earnings forecasts, suggesting that a significant degree of underperformance is already factored in.

“Europe’s valuation discount is partly due to its sector composition, with fewer tech stocks compared with the US. European indices are more weighted towards industrials and commodities, which have faced challenges from global demand and a weaker Chinese economy. However, every European sector currently trades at a larger-than-average discount versus their US counterparts, reflecting general investor pessimism.

“Policy stimulus in Europe may yet surpass market expectations. While the US seems eager to impose tariffs on China, relations with Europe are likely to remain less hostile. The ECB [European Central Bank] is expected to continue easing, encouraging consumer spending, and European leaders have fiscal tools to counter aggressive trade policies. Efforts to deploy the remaining EU recovery fund may also accelerate.”

See also: BlackRock launches AI funds for European investors

Some of the headwinds facing Europe are not new. Even before Trump’s election victory, the continent was battling weak growth and a manufacturing slump, intertwined with the political uncertainty in its traditional powerhouses – France and Germany.

Meanwhile, GDP growth forecasts remain weak. According to the International Monetary Fund’s October economic outlook, Europe’s real GDP is set to grow 1.6% in 2025 – the same as in 2024.

“Recently, there has been a shift in global trade dynamics,” says Abhi Chatterjee, chief investment strategist at Dynamic Planner.

“There is a clear path of transformation of emerging market economies from a ‘manufacture and export’ model to a ‘consumer’ one, predominantly in China and India. This has attracted growing imports from manufacturers in Europe, predominantly in the luxury and automotive sectors,” he explains.

Read the rest of this article in the December issue of Portfolio Adviser magazine

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

Earlier this year, De Jager, an independent adviser and former CEO of SW Mitchell Capital, published a white paper on behalf of the Independent Investment Management Initiative (IIMI), entitled Exploring our corporate structures: plan for the worst, even in the good times.

The research was partially prompted by the downfall of Odey Asset Management in 2022, which the paper states “brought to light several abuses of the governance structure in the firm – an LLP named after its founder, and closed due to severe allegations related to him”. “While we do not condone any abuse of power, in any structure, it is a sad truth that bad actors may be able to manipulate the structures within which they operate,” it says.

When the paper was first published, IIMI, which today comprises 50 member boutique and specialist firms, found 67% of its constituents operated as private limited companies. The remaining 33% operated as limited liability partnerships, although one of these PLCs – Evenlode Investment – is an employee ownership trust (EOT).

Practice playbook

Speaking to Portfolio Adviser, De Jager says corporate structure is “a sensitive subject”. “It often leads to people talking about succession and due diligence. It’s really hard to set up an event on this topic, because people want to have these conversations one on one and not necessarily in an open forum.

“The precipitation for this [white paper] came because suddenly there was a negative example of a governance failing. We felt that, rather than this be a subject we discuss privately within IIMI, it was important to put out a type of practice playbook.

“Most of our members have good protections in place, but the purpose of the paper is to flag that it isn’t a case of ‘one size fits all’.”

IIMI CEO Hristova says that, within a broader context, IIMI recently joined City Hive’s ACT Alliance – the corporate culture standard for investment companies – so culture and values are “at the forefront of the conversations [IIMI is] having from a boutique perspective”.

Read the rest of this article in the November issue of Portfolio Adviser magazine