The Baillie Gifford US Growth Trust trimmed its exposure to Nvidia this summer and portfolio manager Gary Robinson is now looking for the next superstar. He believes SpaceX and Stripe – the trust’s two largest unquoted holdings – could both enjoy Nvidia-like success, while other areas poised for exponential growth include autonomous cars, robotics, quantum computing and inferencing chips.

The trust has owned Nvidia for many years and it remains a top-10 holding but now that it has a $3trn market capitalisation, supranormal growth may be harder to achieve.

Two types of chips are needed for artificial intelligence (AI): graphics processing units (GPUs), which are required to train AI models; and inferencing chips, which allow AI models to consider different answers and draw conclusions. Nvidia has a 90% market share in GPUs but Robinson thinks inferencing will become a much larger market.

“Over the very long term, the inferencing compute market is probably going to be many multiples the size of the training compute market, because training is a function of the number of researchers, but inferencing is a function of the number of users of AI, which is going to be absolutely massive,” he explained.

Nvidia will participate in the inferencing chip market but many other players are building their own inferencing chips, including Google, Amazon’s AWS Inferentia and private semiconductor company Groq.

High-speed internet provision is another “gargantuan” market, in which SpaceX has a dominant position. SpaceX’s Starlink satellites can provide low latency, high bandwidth internet anywhere in the world and it has developed an aviation service to provide high-speed in-flight internet. “SpaceX is just so far head, there’s no one even close in terms of launch capability,” Robinson observed.

He is not deterred by Elon Musk’s support of Donald Trump or by the prospect of him taking on a political role. “Musk has surprised us over time by his unique ability to juggle multiple balls,” he said. “I've been very happy with the execution at Tesla and at SpaceX.”

SpaceX is currently the US Growth Trust’s largest holding (worth 7.6% of the portfolio as of 30 September), followed by The Trade Desk, Amazon, Stripe and Nvidia. Rounding out the top 10 are Meta Platforms, Shopify, Netflix, Tesla and DoorDash.

Quantum computing is another area with huge potential. Californian start-up PsiQuantum has received grants from the US and Australian governments and this high-level endorsement should help it to raise capital from private investors, Robinson noted.

He also believes investors outside the US have been slow to appreciate the breakthroughs in driverless cars. “The world is asleep at the wheel on autonomous driving,” he stated.

Robinson has just returned from five weeks in Silicon Valley. Hailing an autonomous Waymo taxi in San Francisco and stepping into an empty car was strange at first but “within two weeks, I became completely desensitized to it and it was just normal”.

A colleague also gave him a demonstration of Tesla’s self-driving mode which is only available in the US.

Baillie Gifford has invested in Aurora Innovation, which is developing software for self-driving trucks that it hopes will be on the road by the second quarter of next year. There have been concerns about AI taking people’s jobs but trucking companies are struggling to hire new drivers so automation would help solve the shortage of workers, Robinson said.

Robotics is another area of rapid innovation. Physical Intelligence, a start-up that received funding from OpenAI and Jeff Bezos, is building general-purpose software to communicate with robots in natural language. It’s early days but this is “the next frontier”, he noted.

Robinson expects the discussion about investing in AI to broaden out from AI-focussed companies to encompass any business using AI to improve its products or the efficiency of its processes.

Companies that are best placed to make the most of AI tend to have large customer bases, proprietary data sets and product-oriented leaders who have the moral authority to make the necessary changes to integrate AI tools. Cloud-native companies have an innate advantage because they are not encumbered with ‘tech debt’ (outdated legacy technology), he added.

Shopify’s Tobias Lütke is an example of a technical, product-savvy leader and the company has masses of data from the two million merchants using its services, Robinson said.

Meta is another obvious beneficiary of AI, he continued. It has an enormous, centralised data set and a product-oriented founder. AI is already having an impact on the levels of engagement on its platforms and conversion rates for advertisers.

US equities did fairly well during Donald Trump's first term (Covid notwithstanding), which goes some way towards explaining his popularity this time, at a moment when Americans are emerging from a cost-of-living crisis and are worried about their economy.

The mood music in the US this week is optimistic, which bodes well.

As Kristina Hooper, chief global market strategist at Invesco, observed: “The US managed to avoid what markets feared the most: a contested election and prolonged uncertainty, which could likely have resulted in a significant sell-off. Instead, we have a decisive victory. Markets like clarity and I expect them to reward this in the short term.”

Performance of S&P 500 during Trump’s first term

Source: FE Analytics

Trump is likely to focus on extending the Tax Cuts and Jobs Act and cutting corporate taxes, which Hooper expects to be positively received by markets.

Yet presidents are not elected in a vacuum and interest rates arguably have a greater impact on investment performance.

Equities usually rally in a rate cutting cycle so long as the economy manages to avoid a recession, which appears to be the case thus far. US assets, especially stocks, also tend to do well in the year after an election.

“Markets clearly believe economic growth will be amplified by Trump administration policies. We can see it in the results of the Russell 2000 Index, which was up more than 4% just a few minutes into the 6 November trading session. However, I still believe support for stocks is more about Fed easing supporting growth,” Hooper said.

However, Trump’s policies on immigration and tariffs are expected to be inflationary, which might slow down the pace of rate cuts.

Two current headwinds that were not as prevalent in 2016 are the extreme concentration of the S&P 500 and the high valuations of its largest stocks. These factors prompted Goldman Sachs to predict that US equities would return just 3% per annum for the next decade or so.

Furthermore, Hooper thinks the euphoria in US stocks this week is overdone and there could be some retracing in the near term.

On the other hand, European and UK equities have overreacted in the other direction and could bounce back, she added.

Hooper will be looking to the Fed for clues about the future direction of the US economy and stock market but her base case is for an economic re-acceleration next year in the US and most other major economies, which should be supportive of risk assets.

Small- and mid-cap stocks in particular should be beneficiaries of this environment, she added.

Jason Hollands, managing director of Bestinvest, concurred and suggested Premier Miton US Opportunities, a multi-cap fund, for investors seeking to diversify away from the S&P 500’s mega-cap tech bias.

Trustnet senior reporter Matteo Anelli canvassed several other fund experts for investment ideas during Trump’s second term.

The person I agree with most is Joe Young, fund research analyst at Rathbones, who expects the world to become a more volatile and less certain place. Therefore, he thinks investors should opt for dynamic strategies that can quickly adapt to changing market conditions, such as the Raymond James REAMS Unconstrained Bond fund.

The past few years have been tough for many fund managers. Rising interest rates were a headwind in 2022 for growth companies especially, then in 2023 and 2024, mega-cap technology companies left most other stocks in the dust, making the increasingly-concentrated indices hard to beat.

Another problem – according to Ross Mathison, co-manager of the £1.2bn Baillie Gifford Responsible Global Equity Income fund – is the reluctance of some fund managers to face up to poor performance.

The biggest temptation for managers is to put their heads in the sand and blindly hope their performance improves, he said, whereas what they really should be doing is reflecting on their mistakes and finding ways to improve their investment process.

“Your philosophy should be set in stone, but your process should be forever iterating,” he said.

One way Baillie Gifford does this is its ‘dividend hall of shame’, where Mathison and his colleagues examine companies they owned that have cut their dividends to see if those cuts were in any way predictable.

Below, he outlines the importance of learning from your mistakes, argues that banks are a poor fit for equity income strategies and reveals why the Baillie Gifford team wants to marry its favourite companies.

Could you explain your investment philosophy?

We believe that when you identify companies that durably compound their earnings, decade after decade, there is a systematic mispricing in those companies.

Our research is set up to identify examples of those mispriced companies by looking at businesses long-term earnings and the dividends that they will deliver.

We are looking for those compounding machines that grow year after year, decade after decade, that can be resilient in tougher economic times.  

What differentiates you from other equity income funds?

When you invest very long term, the emphasis of the process becomes different. We always say that we are not looking to hold these companies for a few days, we want to get married to them and continue to own them 10 years from now.

What matters to us over the long term is that we get the earnings direction right, that we get the magnitudes correct, and that this will be far more influential for long-term returns than the earnings multiple.

What do you mean when you say you invest in responsibly growing businesses?

We want to invest in businesses that, in aggregate, are not causing harm. This was born because clients in our sister strategy had certain ‘red lines’ on sectors and companies they did not want to profit from, and it is a core part of our philosophy.

That is not to say we will not invest in companies with material impacts, for example we invest in Albemarle, a lithium mining company. But the other side to this is without lithium, we have no batteries, and without batteries, we don't make the transition to electric vehicles and cleaner forms of energy storage.

What was your best-performing stock over the past year?

CAR Group, which is an Australian car listing business that is used by dealers to move inventory around.

It’s a business that has done exceptionally well recently, with the stock up by 35% this year. CAR has developed a strategy to go beyond Australia and has now rerated materially.

It could grow at a faster rate if it wanted to, but it is more focused on how it can hand down growth to the next generation rather than optimising earnings.

And your worst?

Edenred, which is a French-owned business that produces meal, food and clothes vouchers in Europe and Latin America.

The company has had a tough time recently, with the stock down by 41% in the past 12 months. It initially did very well for us and was a big beneficiary of inflation but it has now derated massively.

But the point to make about that is, so what? All managers make mistakes; what matters is what you do with those mistakes and how you can learn from them. So, we have an exercise called the dividend hall of shame, where we look back at companies that have cut dividends to figure out if those cuts were predictable and see how we can improve our process.  

The fund was a top-quartile performer over five years but has fallen to the third quartile over three years. Can you explain this dip in relative performance?

Most of that comes from underperformance over the past year, when several deep cyclicals that we do not hold, such as European banks, have done very well.  

There are certainly lots of great banks, but in general, we do not think they are a good long-term fit for our fund. Banks require a lot of capital and balance sheets are so complicated that even when you think a bank is relatively vanilla and clean, there are always risks. When confidence in banks goes, things can unravel very quickly.

We want to provide resilience by avoiding companies that are cyclical and driven by interest rates. Instead, we prefer to focus on how management can pivot a business towards growth.

Performance of fund vs sector and benchmark over 5yrs

Source: FE Analytics

What do you do outside of fund management?

I'm a dad to two girls who take up most of my time and I'm a big sports fan.

My side hustle is that I dislike the current gender and cognitive imbalance in our industry, so I am working to see what small part I can do to change that.

The Federal Reserve has reduced its benchmark interest rate by 0.25% to a target range of 4.5%-4.75%, marking a slowdown from September’s 0.5% rate cut aimed at shoring up a weakening jobs market.

The decision followed a two-day federal open market committee (FOMC) meeting that began a day later than usual due to the US election, which saw Republican candidate Donald Trump win the race to the White House.

At a post-meeting press conference, chair Jay Powell highlighted the economy’s resilience but refrained from speculating on potential impacts from incoming president Trump’s proposed policies, which include tax cuts and extensive deregulation. Powell emphasised the Fed’s commitment to remain data-driven and impartial in its policy decisions.

“My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. The economy is strong overall and has made significant progress toward our goals over the past two years,” he said.

“We continue to be confident that with an appropriate recalibration of our policy stance, strength in the economy and the labour market can be maintained, with inflation moving sustainably down to 2%.”

Powell also stated that he would not resign if Trump asked him to, citing legal protections that prevent a president from dismissing a Fed chair prematurely. When asked about his response to such a potential request from Trump, whose advisers had suggested the president-elect may ask for his resignation, Powell said it is “not permitted under the law” for a new administration to dismiss a Fed chair before the end of their term.

Trump’s victory has raised concerns among economists about potential inflationary pressures and a slowdown in growth, given his policy agenda. The Fed’s statement affirmed that economic conditions remain “solid”, even as the labour market has shown signs of cooling compared to earlier in the year.

James McCann, deputy chief economist at abrdn, said: “The Fed stuck to the script, delivering a well telegraphed 25 basis point interest rate cut as it continues to take its foot off the policy brakes. However, the central bank will face more difficult decisions moving forward with Donald Trump re-elected on an agenda to deliver broad changes in trade, immigration, regulatory and fiscal policy, all of which could have clear implications for the growth and inflation outlook.

“Against the backdrop of heighted policy uncertainty, the Fed will likely look to keep its options open, signalling that policy moves will be very much data dependent and that the central bank is not on a preset course. This was a message that came through clearly in the FOMC press statement which continues to flag uncertainty around the outlook and the need for the Fed to monitor a wide range of incoming information.”

Markets prefer certainty and US equities have been rallying since it became clear on Thursday that Donald Trump would clinch an election victory.

Fund selectors, portfolio managers and traders are now turning their attention to which asset classes, sectors and funds are likely to prosper once Trump’s second term gets underway next year.

Trump’s policies are generally believed to be inflationary, from tariffs that will drive up prices to his pro-growth agenda. Banks would be a clear winner from inflation but longer term bonds are likely to struggle.

Tariffs and trade wars would penalise emerging markets, especially China, but American companies that rely on foreign imports, such as food retailers, could also suffer. On the other hand, domestic-focussed smaller US companies should fare better.

Against that backdrop, Trustnet asked fund selectors to suggest strategies that have the potential to outperform during the next four years.

M&G North American Value

Chris Metcalfe, IBOSS’ chief investment officer, expects the US equity market to continue performing strongly in the early part of Trump's second term, except for some renewable energy plays and companies that rely heavily on government subsidies. However, he expects headwinds to develop in the second half of Trump’s presidency as inflationary tariffs and policies create problems for the Federal Reserve.

M&G North American Value remains one of IBOSS’ top fund picks. “This fund comprises about 25% of our explicit US holdings and sits alongside an S&P 500 tracker and the Hermes US SMID Equity fund,” Metcalfe said.

“Daniel White has been the fund's lead manager for over a decade and it is fair to say that running value in the US has been one of the toughest gigs going. We think some value names have been overlooked in the past few years with the global obsession around the Magnificent Seven.”

Performance of fund vs sector and benchmark over 5yrs

Source: FE Analytics

The fund's biggest positions are Alphabet and Meta and its largest sector weight is technology, but its 15% allocation is considerably less than the benchmark’s 32% tech weighting.

White’s third-largest holding and biggest stock overweight is Oracle, which has been performing strongly since 2022.

Raymond James REAMs Unconstrained Bond

Joe Young, fund research analyst at Rathbones, expects the world to become more volatile and less certain. “New tariff and immigration policies place a question mark on the simple falling inflation and interest rate narrative. Proposed cuts to corporation tax, without an equal offsetting balance, are likely create a more challenging environment for treasuries as a larger deficit would lead to higher rates demanded,” he explained.

Elsewhere, conflicts in Ukraine and the Middle East could escalate at any time, impacting a range of asset classes and dampening risk appetite.

Investors therefore need dynamic strategies that can adapt to changing market conditions, such as the Raymond James REAMS Unconstrained Bond fund, he said.

Reams Asset Management’s fixed income team has a strict valuation discipline and reacts opportunistically to market dislocations, dialling the fund’s asset allocation and duration exposure up and down dynamically. The managers are happy to wait in cash and treasuries when valuations are full and then pounce when there’s a market sell-off, Young explained.

Performance of fund vs sector over 5yrs

Source: FE Analytics

This strategy could face headwinds if volatility is low or if areas where it has low exposure stage a rally but, overall, Young expects it to deliver smoother outperformance than competitors.

Premier Miton US Opportunities

A simple way to play the post-election relief rally would be a low-cost S&P 500 index fund, said Jason Hollands, managing director of Bestinvest.

In addition, small- and mid-cap funds such as Premier Miton US Opportunities stand to benefit from Trump’s efforts to boost the domestic economy. This fund would complement a large-cap tracker by providing diversification away from the Magnificent Seven, he said.

Performance of fund vs sector over 5yrs

Source: FE Analytics

Managed by Alex Knox and Hugh Grieves, its largest positions are in Graphic Packaging Holdings, which designs and produces consumer packaging, and CBRE Group, which specialises in commercial real estate services and investments.

Polar Capital Global Financials Trust

If Trump cuts corporate taxes and deregulates the financial services sector then banks stand to outperform, Hollands continued. Higher inflation would also increase banks’ profit margins as they would be able to lend money at higher rates.

Mergers and acquisitions might pick up now that the election outcome is known, which would bolster investment banks. Asset managers, meanwhile, usually do well in a rising equity market.

Therefore, Hollands suggested Polar Capital Global Financials Trust, which invests in banks, insurers and asset managers, with about half its portfolio in the US.

Performance of trust vs sector and benchmark over 5yrs

Source: FE Analytics

Amundi US Equity Fundamental Growth

Finally, Meera Hearnden, investment director at Parmenion, prefers not to select funds based on politics or a four-year view. “It is impossible to know at this stage which of Trump’s policies will materialise and to what degree and so it’s hard to make a call on which fund will benefit most,” she explained.

Performance of fund vs sector and benchmark over 3yrs

Source: FE Analytics

She holds Amundi US Equity Fundamental Growth, a fairly concentrated, large-cap growth fund with a strong valuation discipline and a focus on sustainable cash flow generation. Amundi picks stocks according to company fundamentals, not macroeconomics or politics, she added.

Making money out of vehicles that have been involved in accidents may not sound the most glamourous of business models, but it is the bread and butter of Copart – the market leader in running online salvage vehicle auctions in the US and globally.

After a vehicle is involved in a collision, damaged in a storm or stolen, in around 20% of claims it is deemed uneconomic to repair and consequently gets declared a ‘total loss’ and the insurer accepts ownership.

Copart helps solve the auto insurance industry’s problem of how to store these ‘total loss’ vehicles and liquidate them efficiently for the best possible price. Over time, it has built a massive network of salvage yards for vehicle storage.

The business model is inherently attractive. It predominantly acts solely as an agent, connecting sellers such as insurance companies with buyers such as dealers and dismantlers via its patented 100% online auction platform. It extracts fees from both buyers and sellers for the sales that it helps facilitate.

Under this agency model, Copart stores salvage vehicles at its yards but mostly doesn’t take ownership of them, therefore largely avoiding inventory working capital needs and associated risks.

Copart has scaled impressively since its foundation over 40 years ago to have 250 locations in 11 countries. It sold more than four million units in the past year. By effectively prolonging the lives of vehicles, Copart is an enabler of the so-called circular economy.

Copart possesses several strategic competitive advantages. In the US, the salvage market has consolidated into an effective duopoly so that there are only two major players; we estimate Copart has over 50% market share.

Copart has a physical and technological competitive moat. It has about 19,000 acres of land zoned for salvage and owns the vast majority of it outright, unlike its major peer which tends to lease its land. The land is a huge barrier to entry. The industry is effectively restricted on supply as obtaining permits to use land as salvage is incredibly difficult.

The business also enjoys strong network effects. It was early to go 100% online and it now has a global buyer base of over one million buyers across 185 countries, helping insurance companies sell salvage vehicles for the best possible price and therefore lowering their effective claims costs.

Copart talks about a flywheel effect where the growth of the buyer base has driven strong liquidity to its platform, with that pool of buyers driving strong pricing, in turn reinforcing Copart as an attractive platform for sellers.

The company benefits hugely from scale economics. Investment in growing its buyer base and delivering service excellence to insurers has helped drive a superior sales run rate and profitability compared to peer IAA.

Copart consequently produces more cashflow which it reinvests into its business. This has meant Copart has materially invested over time into land, creating ever stronger network density and limiting towing costs to Copart’s yards. Copart’s reinvestment culture can be seen to reinforce its competitive edge.

We believe Copart can leverage several growth drivers. Cars today have much more sensors and equipment than previously. This is particularly the case for electric vehicles. Combined with ever increasing labour costs, this is making it more likely that cars are uneconomic to repair and declared a total loss, driving higher volume to Copart's platform.

Safety features within cars are clearly worth monitoring, but distracted driving including the use of mobile phones is limiting the effects of the new technologies on accident frequency rates.

Copart is also having success in growing its non-insurance volumes which are now about 20% of its mix, including striking deals with car rental companies and from finance companies dealing with repossessed vehicles. It is making good progress internationally, with particular success in the UK and Germany.

Accidents happen regardless of economic conditions and Copart has managed to grow its profits well through different economic cycles.

Copart's founder Willis Johnson is still involved today as co-chairman, alongside his son-in-law Jay Adair. The management team has been very stable and has made astute capital allocation decisions.

In the past 10 years alone, the stock has compounded at over 28% per annum. It now boasts operating margins above 35% and a return on invested capital of around 18%. Its balance sheet with around $3.4bn net cash provides considerable financial flexibility.

Copart’s strong management and its competitive advantages position it well to drive continued financial success and we were recently introduced it into our Global Best Ideas Equity fund.

Gerrit Smit is head of global equity management at Stonehage Fleming Investment Management. The views expressed above should not be taken as investment advice.

Having historically delivered competitive returns, steady income and a low correlation to other assets classes, a period of rate hikes in 2022 and 2023 has been anything but straightforward for real estate investment trusts (Reits) across the globe.

In their simplest form, Reits are a geared play on interest rates. If longer-term bond yields fall, they should do well, while a return of inflation (and bond yields rising) means they will struggle. Rising rates were clearly a headwind on performance for the asset class for the past couple of years (2022-2023), with higher interest rates meaning a higher cost of borrowing for Reits. During that time, global equities returned almost 8% to investors, while the global Reit market fell 12.5%.

However, it should be noted that during this challenging period many Reits continued to show strong fundamentals. As a research note from Fidelity points out: “Commercial real estate supply-and-demand dynamics remained generally favourable in 2023. Moreover, in most parts of the real estate market, Reits’ balance sheets remained well positioned to weather the market environment.”

But the clouds have begun to clear as peak rates have passed, with the majority of the developed world’s central banks now beginning to cut rates. Historical research shows that over the 12 months when a real estate cycle begins to move from trough to recovery, listed real estate securities tend to outperform equities and private real estate. This is because of the correlation between bond yields and real estate valuations.

Cohen & Steers head of listed real estate Jason Yablon says the prospect of falling rates and lower discount rates provides meaningful tailwinds for global Reits. With lower interest rates reducing borrowing costs for Reits, it will enable them to finance acquisitions and developments, supporting asset values.

Yablon cites the fact that since 1990, listed Reits have had average annualised monthly total returns of 18.9% when growth and yields were down. By comparison, listed Reits have had average annualised monthly returns of -11.7% when growth was down but yields were up. Yablon also believes Reits are attractively valued relative to both equities and private real estate. Reits were trading at a -5.8x earning multiple spread to equities at the end of June, compared with an historical average of 0.5x – this has typically been a strong forward indicator for listed Reits.

Euan Anderson, investment director, real assets at abrdn, says Reits are also starting to benefit from a cost of capital advantage relative to the private real estate market, with many having strong balance sheets to raise capital and growth through acquisitions.

He says: “Backed by a stronger financial footing, and buoyed by attractive fundamentals, many Reits have been able to deploy capital at the bottom of the cycle. This has allowed them to grow externally through acquisitions and to benefit from above-market growth. This provides Reits with a distinct competitive advantage versus private-market peers who tend to rely on bank lending which remains challenging to source.”

I also want to touch on some of the longer-term trends impacting the Reit market, many of which are transformative to the sector. For example, the rise of e-commerce and the growing need for industrial and logistic properties (such as data centres). There are also thematic Reits with significant growth potential, such as healthcare, as well as the growing adoption of proptech (property technology) to improve operational efficiency, tenant management and data reviews.

Marcus Phayre-Mudge, who manages the TR Property Trust - which invests in Reits plus shares and securities of property companies and property-related businesses – says his portfolio is currently geared at around 15% (it can go up to 20%), indicating his optimism.

He says: “It comes back to the triple whammy of benefits to the sector. The cost of money is coming down and margins are shrinking. You have to pick very carefully, but the market fundamentals are there and there’s also been a lack of development, meaning we are buying real estate at below rebuild costs, while the equity market is offering us shares in companies at well below rebuild costs.

“The third leg is it’s not just us doing it – private equity will return and that will underpin values in the equity market. We hope to make money either from that consolidation or from companies that are taken private.”

There are caveats investors have to consider. For example, some Reits have greater exposure to the economy, such as offices, industrial warehouses and retail.  If rates are cut due to a poor economy, these Reits may struggle as tenants have issues paying rent. As a result, we prefer less cyclical areas of the Reit market, like GP surgeries and supermarkets.

Reits have been badly beaten up after years of struggles when the wider stock market has been reaching new highs. But they now look attractively valued, with high yields and big discounts still on offer, amid an improving macro backdrop.

In addition to the TR Property Trust, investors may also want to consider the CT European Real Estate Securities fund (also managed by Phayre-Mudge) or the Cohen & Steers Global Real Estate Securities fund, a one-stop shop for Reits which is backed by a huge team of analysts covering a universe of around 400 different Reits. Those wanting some Reit exposure via a multi-asset fund might consider the VT Momentum Diversified Income fund, which has the likes of the AEW UK Reit and the PRS Reit among its holdings.

Darius McDermott is managing director at Chelsea Financial Services and FundCalibre. The views expressed above should not be taken as investment advice.

Value funds’ strong performance in 2022 and 2023 hasn’t been replicated this year, but some value strategies have still managed to outperform.

The Fidelity Special Situations fund, run by FE fundinfo Alpha Manager Alex Wright, is one of them, outperforming its sector, benchmark (the FTSE All Share index) and the MSCI UK Value index.

Wright achieved that by looking in areas where other people are not – something that, admittedly, has got easier by the decade.

Performance of fund against sector and indices over 1yr

Source: FE Analytics

“It has always been a bit contrarian to be a value investor – looking at things other people don't like to look at – but it's become more contrarian over the last 10 years,” he said.

“That means there's less money invested in the space and less people looking at these stocks, so the chance of adding idiosyncratic alpha is higher now than it was 10 years ago.”

About a decade ago, value funds were already only 2% of people's investable assets in the UK, while at the same time, the domestic market accounted for 10% of the average investors’ investments.

Today, the UK allocation has fallen a substantial amount to only 6% and UK value funds are only 0.7% of people's total investments, as the chart below suggests (taking into account the top-eight active value IA UK All Companies strategies: Fidelity Special Situations, Jupiter UK Special Situations, M&G Recovery, Man GLG Undervalued Assets, JOHCM UK Dynamic, Schroder Recovery, Invesco UK Opportunities and Ninety One UK Special Situations).

This suggests more than £4bn has been taken out of the biggest UK value funds, which, according to Wright, should give an edge to those who remain invested.

“While it has been a tough time in terms of flows, that is setting up a really good opportunity to outperform,” he said.

Opportunity for alpha in UK value increases as competitors look elsewhere

Source: Fidelity International, Morningstar Direct, 31 August 2024.

“If you're competing with hundreds or maybe even thousands of other investors, it's incredibly hard to get an idiosyncratic edge – as it is for stocks such as Tesla, Nvidia or Apple,” he continued.

“Whereas, if you're looking in the UK market, which is unloved, and then in the value space down the market-cap spectrum, you're possibly competing with maybe tens of other investors, so the chance that you can find something that the market has missed is much higher.”

That is accentuated by the fact that there aren’t that many value funds available in the first place, despite the UK being a value-focused market, as Wright highlighted in the chart below.

Fund style bias within an increasingly growth-leaning peer group

Source: Fidelity International, Morningstar Direct, July 2024.

This observation was also made by Legal and General Investment Management fund manager and researcher Francis Chua.

According to his data, about 5% of UK funds show a value tilt from their label, while a regression analysis, which looks at the historic returns generated from its holdings, highlighted that 15% to 20% of IA UK All Companies funds exhibit a value factor.

But the scarcity premium wasn’t enough for Chua to allocate more to value in his portfolios. Quite the opposite: the value overweight that he maintained between 2022 and 2023 has evolved today into a more neutral stance, mainly driven by two reasons – the economic cycle and valuations.

“From a macro perspective, the economy is closer to a late cycle than it was before and typically late cycles are about a preparation for a turn, where value is not necessarily a good place to be,” he said.

“Also, the strong performance value has had over the last 18 months has weakened the valuation argument versus the market-cap index in the UK.”

For Christopher Carlton, head of fund selection at abrdn, value's potential can only be realised if and when flows turn more positive.

“The flow of funds out of UK value certainly creates the opportunity for managers to find high-quality companies at attractive valuations, however for this value to be realised in the stock price it may also require us to see a return to positive capital flows into UK equities,” he said.

For this reason, he has not been increasing exposure to value in the MyFolio range of portfolios, which don’t usually tilt too aggressively to a particular style factor.

“Among the fund of funds which allocate to active managers, we have retained a consistent exposure to fund teams that are specialists in allocating to UK value and who we believe will be significant beneficiaries should some of these attractive valuations begin to be realised in stock prices,” he concluded.

The Bank of England’s monetary policy committee (MPC) has announced its second consecutive interest rate cut this year, bringing the base rate down by 0.25 percentage points to 4.75%.

This decision means that the base rate is now at its lowest point since June 2023, which should make borrowing money cheaper but will reduce returns for savers moving forward. The cut had been widely priced in by analysts following headline inflation declining to 1.7% in September, the first time in over three years that inflation had fallen below the Bank’s 2% target.

However, Bank of England governor Andrew Bailey warned: “We need to make sure inflation stays close to target, so we can't cut interest rates too quickly or by too much.”

Moving forward, most market analysts predict that interest rate cuts will begin to slow down, as pressures from last week’s Budget and Donald Trump’s decisive US election victory may create inflationary fears.

Shamil Gohill, portfolio manager at Fidelity International, said: “Cost increases for companies from higher taxes, national insurance and national minimum wage will likely be at least partially passed on to consumers via price hikes next year.”

Neil Shah, executive director at Edison Group, added: “If the US economy becomes more protectionist or even moves towards a trade-war scenario, the ripple effect could impact UK inflation, as reduced global trade could stymie growth.”

All eyes will now be on the Federal Reserve, which is expected to announce its own 0.25 percentage points rate cut when it meets later on Thursday.

Donald Trump has won a historic victory and clinched a second term in the White House, causing a surge in the US stock market, the dollar and bitcoin.

But investors are already weighing up a longer time frame than the immediate reaction to the result and asking how the market could react once Trump takes power in the coming weeks.

With this in mind, a range of investors outline their views on the president-elect Trump’s proposed policies and their impact on the market.

Neuberger Berman: An extraordinary 24 hours

Rebekah McMillan, portfolio manager at Neuberger Berman, argued that Trump’s victory maintains – and possibly strengthens – the US exceptionalism narrative and could support performance within the US equity market broadening outside of mega-cap technology stocks.

“An extraordinary 24 hours and, given expectations regarding the closeness of the race, the Republicans have unarguably outperformed. While the outcome of the House remains unknown, we are watching markets closely. The reaction in initial trading sessions has been clear: risk-on sentiment leading to a broad equity relief rally with a pro-US tilt, lower VIX, USD strength and bear steepening across the curve,” McMillan said.

“In all likelihood, large policy shifts can take months to enact and therefore we would caution against overreaction as markets look to reposition around the result over the coming days. Two longer-term dynamics are likely to persist regardless: a resilient US economy and a deteriorating US debt profile.”

Close Brothers: 2025 should be a good year for the US

Isabel Albarran, investment officer at Close Brothers Asset Management, noted that Trump’s policies are likely to be inflationary and pointed to his tariff plans, tighter immigration controls and tax cuts as potential sources of inflationary pressure.

Outside of the US, international trade is likely to be impacted – especially Europe and Mexico. Trade with China will also be affected, although the Biden administration had a hawkish stance like Trump’s.

“Despite these potential consequences, ultimately, we do not expect today’s result to threaten the US barnstorming economic performance. Aside from October’s soft payrolls, activity has remained robust,” Albarran said.

“With over $1trn of fiscal support still to be digested by the economy and the regulatory backdrop on course to ease, growth has a number of backstops. Moreover, the economy, and the stock market, tends to do well in the first year of a presidency, meaning 2025 should be a good year for the US.”

Quilter Investors: Volatility is likely to be the defining feature of this presidency

Lindsay James, investment strategist at Quilter Investors, said “volatility is likely to be the defining feature of this presidency” and agreed that many of Trump’s policies will be inflationary.

“Bond yields are up and the dollar has risen too as a result. Widespread tariffs will now likely be implemented, choking global trade in the meantime, while the deficit is likely to grow ever larger, at a time when markets are getting a little nervous about the sheer scale of spending. While the economy was perhaps the defining feature of this election for voters, an emboldened Trump presidency is likely to add fuel to the fire,” she added.

“While over the long-term US elections have had a minimal impact on stock markets, investors will likely see a Trump presidency as a positive for the share prices of many of America’s companies. With proposals for business tax cuts paired with steep tariffs on imports, US corporate profitability is projected to improve, although tariffs will elicit an international response and far-reaching consequences.

“Indeed, in our recent survey of some of the world’s largest asset managers, a Trump presidency was seen to be mildly positive for markets, compared to no change for a Kamala Harris administration – although highlighting his volatile nature, the spread of views for Trump was far greater.”

IBOSS: We must consider China's response to a Trump presidency

Chris Metcalfe, chief investment officer at IBOSS, agreed that Trump’s return to the White House is likely to be “positive but volatile” in the short term. However, the inflationary agenda and potential trade disruptions will emerge as negatives.

“One key aspect we must consider is China's response to a Trump presidency, which remains uncertain. China has various options available to it, and their strategy will be critical in shaping global market dynamics,” Metcalfe said.

“I think it would be a mistake to expect the market reactions of the next couple of weeks to continue to play out for the rest of his presidency. As a Trump America becomes more isolationist and further dismantles the globalisation narrative, new relationships will be forged between countries and economic blocks, and it is too early to say how that will look.”

IG Group: Volatility in the year after an election is higher

JJ Kinahan, chief executive of IG Group North America, noted that markets reacted positively to the news that Trump had won the election and pointed to “seemingly good expectations” for the economy as another positive.

“However, there are a several points that traders should keep in mind; those vying for extreme market volatility [following the election outcome] will be very disappointed, and this is actually normal market behaviour,” he added

“But what traders should be aware of is that historically, the volatility in the year after an election is higher, starting in January as the new president takes office and tries to enact their agenda.”

IG Group also listed the sectors that it expects to do well under the Trump presidency as well as the stocks within them to watch. These include financials (JP Morgan, Citigroup), cryptocurrencies (Coinbase, PayPal), defence (Boeing, Lockheed Martin), energy (Exxon Mobil Corp, ConocoPhillips, Peabody Energy Corp, Nucor Corp) and technology (Amazon, Google, Microsoft).

St. James’s Place: Unwise to make significant adjustments based on political events

Justin Onuekwusi, chief investment officer at St. James’s Place, said equity sectors tied to international trade – particularly tech and consumer goods – could be more volatile given Trump’s focus on international negotiations. However, industries like traditional energy, financials and defence could be given a boost by his emphasis on deregulation and corporate tax cuts.

Meanwhile, there could be higher short-term volatility in bond markets, especially around US treasuries, as investors adjust to the election result. The potential for higher inflation might also cause yields for long-term bonds to rise higher than short-term bonds, which sometimes signals the start of a strong economic period but can also herald higher interest rates.

“Elections, particularly ones as contentious as this, have a way of stirring up short-term market volatility. However, history has shown it is unwise to make significant adjustments based on political events. Market volatility is often based on speculation and not any change to fundamentals,” he said.

“While elections may create temporary volatility, we believe remaining disciplined and building a diversified portfolio is the most effective means of delivering long-term value. It is important to remember the main risk from market events is the poor decisions we can make when they occur, rather than the ramifications of the events themselves.”

Even the mightiest funds can fall. No matter how skilful or experienced, all fund managers eventually experience periods of poor performance and as markets shift, no strategy can expect to stay on top forever.

Understandably, when a fund you hold experiences underperformance, it becomes tough to continue trusting the manager with your money. As a result, many investors cut their losses and search for better opportunities elsewhere.

However, Simon Evan-Cook, manager of the VT Downing Fox range of funds, said that this approach reflects a misunderstanding of the goals of active funds, as well as the characteristics needed to be an exceptional fund manager.

He said: “Bad performance is a feature, not a flaw of a great fund. I have never met a great fund manager who did not have a horrendous year relative to the index. You just have to accept it.”

For Evan-Cook, the industry has become too short-term focussed, with periods of underperformance leading to active managers developing bad reputations they do not deserve.

While it is understandable that failure to outperform the index may cause some investors to lose faith, Evan-Cook said it was important to have patience when choosing active funds.

“The hardest thing, even as a professional investor, is the emotional pressure when you see a fund manager underperforming over one, three or five years, to end that pain of holding by just selling off,” he said.

Even he had made this mistake, selling a laggard only to see it start outperforming within a few years when its style returned to favour. “Invariably, whenever I've done that in the past, you end up finding three years later that fund is top of the performance table, winning awards for incredible performance,” he rued.

The aim of active funds is not to beat the index year-on-year but to deliver strong long-term returns, and in this regard, underperformance does not make a portfolio a failure, he argued.

Instead, he believes it should be more concerning when a portfolio has a near-perfect record because this indicates that a manager is doing something unsustainable, such as letting their strategy be dictated by top-down themes.

“If I see a fund manager who has had 10 years in a row where they have outperformed, I’m almost more sceptical about that sort of fund", he added.

How do you identify the best managers?

So, if bad performance is a natural experience for even the best of the industry, what is the ‘X-factor’, that separates perfectly competent managers from the next Terry Smith?

While Evan-Cook admitted that identifying exceptional managers is “an art, not a science”, he believes all the best managers have one thing in common: they are bottom-up investors.

Great managers analyse companies, not megatrends, he said. They look at companies’ balance sheets, valuations, management and competition and use that data to shape their investment decisions.

The best managers constantly reassess their portfolios, identifying companies that are too high risk or overvalued and replacing them with similar stocks that are more desirable, he continued. As a result, they best managers often run a constantly moving portfolio that may have an entirely different stock composition in 10 years’ time, like the classical concept of Theseus’ ship.

Theseus constantly replaced parts of his ship so by the end of his journey, it was made of entirely new parts, leading to the question of whether it was still the same ship.

“We would say yes, it is the same ship”, Evan-Cook said, and exceptional fund management works similarly. “In 10 years, my portfolio may look and act the same, but it will be made up of almost entirely different stocks.”

Index trackers or passive funds cannot match the level of flexibility offered by expert active managers pursuing a bottom-up strategy, he continued.  

Moreover, for Evan-Cook, exceptional fund managers have a mixture of belligerent and conscientious management styles, which he described as a ‘bellicious’ approach.

Essentially, the characteristic that separates exceptional active managers from the rest is their determination to stick to their investment philosophy. They will continue to invest in the way they feel is best without being tempted by sudden top-down developments like some of their peers.

Evan-Cook commented: “If you try to push them on their process or philosophy, the greatest fund managers of all time will not move.”

This combination of characteristics is what separates a perfectly competent fund manager from the likes of Terry Smith or Warren Buffett.

Evan-Cook concluded: “It's not that hard to find good fund managers, the real test is holding onto them because there will be years in which the most amazing fund manager looks like an idiot”.

Peter Walls has built a position in Chrysalis Investments in his Unicorn Mastertrust over the past three months, after adding RTW Biotech Opportunities last year.

He also has a bias towards trusts investing in private equity and small-caps – relatively illiquid asset classes where he feels the closed-ended structure works best – and believes that Japanese small-cap trusts offer outstanding value.

Below, Walls explains his investment thesis for 10 trusts in his portfolio and highlights the strong performers he is top-slicing, as well as the out-of-favour areas and trusts on wide discounts where he sees catalysts for improvement.

The newest addition: Chrysalis

Chrysalis Investments is a rags to riches to rags story. It came to market in November 2018 at 100p a share, peaked at 271p a share on 3 September 2021 after stellar returns, then dropped to 53p a share on 24 March 2023 and again on 27 October 2023. Shareholders sold out after disappointing performance and over concerns about the managers’ high incentive fees.

Performance of Chrysalis vs sector since inception in total return terms

Source: FE Analytics

The trust’s managers, Nick Williamson and Richard Watts, left Jupiter Asset Management at the end of November 2022 to establish an independent investment firm, completely focussed on running the trust. Performance fees were reduced to 12.5% from 20% and an annual cap was imposed.

Chrysalis is currently trading at 85p a share and is on a 37% discount to its net asset value, Walls said. It recently committed to buying back £100m of its shares.

The trust specialises in high growth, private companies such as Starling Bank, its biggest holding, and Klarna, the buy-now-pay-later company which is expected to go public next year.

In July 2024, portfolio company Graphcore was acquired by Softbank at a 25% premium to its carrying value. The trust announced that it would return cash raised from this sale and from future realisations to shareholders via buybacks.

Walls first invested in Chrysalis on 23 July 2024.

RTW Biotech Opportunities

Another fairly recent addition to the Unicorn Mastertrust fund is RTW Biotech Opportunities. Walls started investing in the trust in May 2023 at a significant discount, just as the biotech sector was emerging from a multi-year bear market.

“The biotech market had been on its knees and suddenly you found that quite a lot of the underlying businesses had net cash and were valued at less than cash in some cases,” he said.

RTW acquired Arix Bioscience late last year, which expanded its firepower but caused its discount to widen.

A notable success for RTW was Merck’s acquisition of Prometheus, a clinical-stage biotechnology company focused on immune-mediated diseases, in April 2023 for $10.8bn. RTW generated a more than 12x total multiple on invested capital in just over three years.

Walls also holds the Biotech Growth Trust and said he was intrigued by significant advances in the biotech sector, with cures being found for a host of diseases.

Performance of trusts vs sector over 1yr

Source: FE Analytics

Japan

In some ways, Japan is similar to the biotech sector in that Japanese companies have a lot of cash on their books and are attractively valued, Walls said.

Unicorn Mastertrust holds Nippon Active Value and AVI Japan Opportunity, both of which focus on small-caps. Of the nine Japanese equity investment trusts, these are the two best performers over one and three years.

Performance of trusts vs sector over 3yrs

Source: FE Analytics

UK small-caps trusts

Rockwood Strategic is Walls’ best-performing holding. It is top of the IT UK Smaller Companies sector over three and five years and second over one and 10 years to 4 November 2024.

Unicorn Mastertrust also owns Aberforth Smaller Companies. It has delivered strong returns in aggregate since inception in 1990, he said, although the manager’s value style has at times fallen dramatically out of favour, leading to a rollercoaster ride for investors.

It was a top performer during the 1990s but went from hero to zero in the technology, media and telecoms (TMT) bubble. By the turn of the millennium it was languishing at the bottom of the performance tables, he recalled. Then it recovered and performed well until the financial crisis, after which low rates and monetary stimulus meant “everyone went crazy for growth, which really slowed them down”.

Walls went back into Aberforth Smaller Companies in 2019.

Performance of trusts vs sector over 5yrs

Source: FE Analytics

Crystal Amber, an AIM-listed activist fund specialising in small and mid-cap equities, is in managed wind-down. It owns 81% of GI Dynamics, a medical device business specialising in type 2 diabetes and obesity, which Walls thinks could be an exciting prospect.

Walls noted that Crystal Amber, which is managed by Richard Bernstein, has encountered some difficulties, including its 16.5% stake in De La Rue. The bank note printer’s shares have risen this year off multi-year lows and it has just sold its authentication division to Crane NXT.

Private equity: ICG Enterprise Trust

Several private equity trusts are trading on significant discounts to their NAVs after a perfect storm in recent years.

Not only did interest rate hikes impact the discount rate used to value many investments, causing investors to shy away from growth stocks, private equity and venture capital, but investors became sceptical about private equity managers’ valuation methodologies.

Walls holds ICG Enterprise Trust and said its valuation methodology has always been consistent.

Investors also deserted private equity trusts because cost disclosure rules – which have recently been changed – made them look very expensive. Walls believes investors were wrong to move away from the asset class because of high fees. “It’s the tail wagging the dog, it’s beyond belief,” he said.

ICG is on a 37% discount which Walls described as “entirely the wrong price”.

Performance of trust vs sector over 10yrs

Source: FE Analytics

Precious metals

Walls has a small allocation to Golden Prospect Precious Metals, which invests in gold, silver and other precious metals, uranium and miners. It was on a massive discount for a long time, he said, but its share price has shot up 50% year-to-date.

Performance of trust vs sector year-to-date

Source: FE Analytics

Walls said he runs a very diversified portfolio and “the winner each year always surprises me”.

It’s perhaps the most hackneyed finance-related cliché, but diversification being the only free lunch in investing has rarely been as important a concept as it is now – a time when stock markets are more concentrated than they’ve been for 40 years or more.

The 10 biggest companies in the S&P 500 index account for 36% of the index. The last time we saw anything like this kind of concentration was in the early 1970s.

That was the era of the so-called Nifty Fifty, a group of 50 companies believed to be the best and fastest-growing companies in America. As Howard Marks recalled in a 2021 letter, these were companies so good that “nothing bad could happen to them” and “there was no price too high” for their shares.

Today, there’s a similar phenomenon going on. Investors are piling into companies so good that nothing bad will happen to them and there is no price that is too high to pay for their shares. Only this time around, there aren’t 50 of these companies, there’s seven.

Nvidia on its own is up 223.6% in the space of 12 months, over 400% in the space of 18 months and more than 1,000% in the past 24 months. That’s a large part of the reason why the S&P 500 remains at or around a record high.

Now, I won’t speculate on what will happen to the Magnificent Seven over the course of the next 12, 18 or 24 months. I will, though, let Marks remind you that the Nifty Fifty all suffered huge share price declines between 1972 and 1974.

“Thanks to the crash, they showed negative holdings-period returns for many years. Their dismal performance cost me my job as director of equity research,” Marks said.

Now, the caveat, of course, is that many (Marks reckons about half) of the Nifty Fifty became household names (think McDonald’s, Coca-Cola and Procter & Gamble). Evidently, those very high valuations were justified given a long enough time horizon.

In reality, very few people have the kind of time horizon needed to stick by even the best of companies when their wealth is being wiped out in real time.

This is a rather long-winded way of suggesting that perhaps some diversification away from equities is worth considering.

Even the International Monetary Fund (IMF) warned recently that there was a “widening disconnect” between escalating geopolitical tensions and low levels of market volatility. Monetary policy easing could fuel asset price bubbles and markets are underestimating risks posed by military conflicts and impending elections, the IMF said.

In this context, perhaps it’s worth looking around for investments that can provide sources of returns that are uncorrelated to equity markets.

Bonds are one popular option here, but while they offer risk-free returns, the equity/bond correlation is unreliable. The persistently negative equity/bond correlation has been a recent phenomenon. From the end of the Bretton Woods era and the start of the new millennium, bonds and equities were positively correlated, data from Schroders shows.

Investment trusts are another option. The investment company wrapper gives retail investors exposure to uncorrelated asset classes favoured by sophisticated or institutional investors. These can include hedge funds, infrastructure or impact assets.

BH Macro is the only London-listed investment company offering exposure to a diversified macro hedge fund. It seeks to produce compelling, asymmetric returns, independent of the market environment and with low correlation to risk assets.

BH Macro invests exclusively in the Brevan Howard master fund, giving it exposure to a variety of asset classes, with a primary focus on global fixed income and foreign exchange but also peripheral exposure to other asset classes, such as equity, credit, commodities and digital assets.

Data shows that BH Macro has a structurally low correlation to equity markets. Note that its correlation to equities is not negative – it’s not necessarily the case that the fund suffers when equities perform well. Indeed, BH Macro has only suffered three individual years of negative aggregate net asset value (NAV) performance since IPO in 2007.

Within infrastructure, the diversified portfolio of low-risk availability-based assets, coupled with largely fixed-rate debt at an asset level owned by BBGI Global Infrastructure has contributed to a steadily increasing NAV performance of 43.7% over five years alongside increasing income that flows through to strong dividend increases.

BBGI generally offers higher levels of downside protection and diversification than other ‘real asset’ trusts, which tend to be more UK-focused.

Greencoat UK Wind falls into the UK-focused real asset bucket, but it has a clear and well-defined approach of investing in wind farms up and down the country. On a discount of 16% and with a yield of almost 7.5%, its potential total returns are attractive, even more so if shares re-rate. A colleague recently ran the numbers and found that Greencoat UK Wind had a negative correlation to the MSCI World index.

For those wanting to do some good with their uncorrelated investments, Schroder BSC Social Impact is worth a second glance. Its assets include social and affordable housing projects for vulnerable people, as well as providing capital for charities and social enterprises working with disadvantaged.

The rents gained from the housing assets have very little correlation with GDP, while the debt and equity investments are backed by charities, associations and local government counterparties, giving them low correlation with other macro factors.

To illustrate the contradictory views of equity market strategists, Goldman Sachs’ David Kostin thinks the S&P 500 will reach 6,300 in 12 months’ time, taking its three-year return to 75%. Yet, he also thinks that the index will gain only 3% a year in nominal terms in the next decade.

At some point, equity investors could see steep losses. Mining the investment company universe for uncorrelated returns could help to ensure they stay committed to high-quality companies that end up, over the long term, winning out.

David Brenchley is an investment specialist at Kepler Partners. The views expressed above should not be taken as investment advice.

Donald Trump will return to the White House after winning a fiercely fought election against Democrat vice-president Kamala Harris, leaving investors looking for parts of the market that will benefit under the new Republican administration.

The immediate market reaction once it became clear that Trump had won the presidential election was a rise in the dollar and bond yields but investors will also be looking at the long-term implications of the result.

Analysts at Saxo Bank noted that elections can be followed by “considerable volatility and new trends” so investors will have to decide whether or how they adjust their investment strategy now Trump has won the race to the White House.

“The 2024 US presidential election stands out due to its unique circumstances: the assassination attempt on Donald Trump, Joe Biden stepping down, Kamala Harris’ quick takeover to name a few,” they said.

“Historically, the connection between election outcomes and markets has been inconsistent, but these dynamics add uncertainty that could translate into the markets.”

For a comprehensive overview of what a Trump presidency might mean for markets, take a look at this very detailed article by Mirabaud senior investment specialist John Plassard.

Saxo’s analysts added that there are three broad strategies investors can take from here: keep calm and carry on (investors with a well-diversified portfolio and a long-term investment horizon are likely to just stick to their strategy); prepare for volatility (investors with one or a few stocks in their portfolio should diversify to mitigate risks); or seek election-driven opportunities (adventurous investors could look for assets that could benefit from a Trump administration).

Justin Onuekwusi, chief investment officer at St. James’s Place, noted that the 2024 presidential election will have consequences beyond November – with the run-up to January’s inauguration and the first 100 days of the new administration being crucial milestones.

“Investors will closely monitor policy shifts, as the first 100 days will be critical in shaping the market landscape and setting the tone for economic growth, inflation management, and sector performance for the coming years,” he continued.

“Markets will react swiftly to the policy direction set during this period.”

Onuekwusi said a Trump-led administration is expected to focus on deregulation, higher tariffs on foreign goods, tax cuts and policies favouring traditional energy sectors, potentially boosting short-term market confidence but raising concerns over geopolitical stability and fiscal discipline.

This contrasts with what might have come with a Harris presidency: a prioritisation of social inclusion, climate action and economic equity, which could have boosted sectors like green energy but might have increased regulation on fossil fuel and technology companies.

For those seeking to tweak portfolios for a Trump presidency, AJ Bell investment analyst Dan Coatsworth highlighted defence contractors, oil & gas producers and cryptocurrencies as the key assets to watch.

“His previous term as president is associated with a strong run for the stock market whereas Biden – and therefore Harris by default – was clouded by a period of high inflation and high interest rates,” he said.

“That put Trump at an advantage in the current election campaign as the cost-of-living crisis has been difficult for the general public and they’re looking for someone to find solutions."

“[But] Trump may not be the solution to a high cost-of-living as his policies are likely to drive up inflation. He wants to impose big tariffs on imported goods (60% from China, up to 20% on the rest of the world) which would significantly push up prices as the extra costs are passed onto the customer.”

Coatsworth said a trade war is the biggest risk to markets under another Trump presidency, as heavy tariffs on imported goods would upset countries that have historically profited from selling into the US. His tendency to provoke foreign leaders with his comments is another problem for markets.

That said, Trump’s desire to cut corporation tax from 21% to 15% for companies that make their products in the US will appeal to many business leaders.

Coatsworth continued: “Trump is expected to strengthen America’s defences which creates more opportunities for defence companies.”

He highlighted VanEck Defense UCITS ETF, which has 64% of its portfolio in US-listed defence stocks. These include American government contractor Booz Allen Hamilton, data insights provider Palantir Technologies and defence, aviation, information technology and biomedical research company Leidos, all of which have contracts with the US military.

“A Trump election victory could also create a tailwind for domestic fossil fuel producers in an effort to fortify America’s energy security,” Coatsworth said.

The iShares Oil & Gas Exploration & Production UCITS ETF is one option suggested by the AJ Bell investment analyst as it has two-thirds of its assets in US-listed businesses, including EOG Resources – one of America’s key oil & gas players.

Finally, Coatsworth said cryptocurrencies could be among the biggest winners now Trump is returning to the White House, as he has pledged to make the US “the crypto capital of the planet” and to build a strategic reserve of bitcoin.

Microsoft, Coca-Cola and Baker Hughes are among the US companies that can continue to thrive despite the changing of president, according to Hargreaves Lansdown analysts.

The US has just gone to the polls following months of campaigning in a closely fought election. During this time, analysts have been highlighting stocks that would benefit the most under a Kamala Harris or Donald Trump presidency, but there are some companies that would be largely unaffected by who is in the White House.

At the time of writing, Republican candidate and former president Trump had just passed the 270 electoral college votes need to win the election. However, not all stocks will be overly affected by who is in the White House.

Derren Nathan, head of equity research at Hargreaves Lansdown, said: “The US stock market comes with an impressive record of outperformance. And, while the new president’s policies could bring some volatility to markets, there will also be some opportunities for investors.

“There’s no guarantee that American companies can keep delivering positive returns, but we continue to see the region as appealing given the range of world-class companies with global reach.”

Below, Nathan offers three US stock picks that are not reliant on the election result.

Microsoft

First up is tech giant Microsoft, which has been a dominant force in software and computer services since the launch of its Windows operating system in the mid-1980s.

The company has evolved over the decades and the focus for its future growth has shifted towards its cloud platform Azure, which provides computing power, storage and databases to allow businesses to build, deploy and manage applications, and artificial intelligence (AI), through its holding in ChatGPT creator Open AI and the integration of AI into its own software.

Performance of Microsoft vs S&P 500 over 5yrs

Source: FE Analytics

“Recent growth rates have continued to impress and the company is having to spend heavily on building-out the infrastructure to accommodate that demand,” Nathan said.

“There’s no guarantee that revenue will continue to grow at the same pace as costs and investment, so expect some bumps in the road as this megatrend plays out.”

He added that such bumps to watch out for include regulation, as policymakers are likely to start taking a look at increasingly intelligent machines, and its valuation, which is above the long-term average and leaves investors at the risk of losses if Microsoft’s growth disappoints.

Coca-Cola 

Next up is soft-drinks powerhouse Coca-Cola, which Nathan said is one of the most profitable companies in its sector thanks to its “unparalleled” brand power and an efficient operating model.  

“Coke is updating its strategy and brand portfolio to focus more on sharpening its proposition on a regional and local level, but it looks more like a refinement than a revolutionary change to us,” the head of equity research added.

Performance of Coca-Cola vs S&P 500 over 5yrs

Source: FE Analytics

“Nonetheless, it's encouraging to see the group moving forward in a market where we still see room for further growth. Changes in consumer preferences are something we’re monitoring, but the group’s made big steps to integrate lower-calorie alternatives and has also been diversifying into the nutritional beverage market.”

Coca-Cola has increased its dividend in each of the last 62 years and is currently yielding 3.1%. Hargreaves Lansdown also highlighted the group’s strong balance sheet and cash flows as positives.

However, Nathan pointed out that the firm’s sales volumes have started to wobble after “a period of hefty price increases” when inflation was soaring. Although these cost increases are starting to moderate, Coca-Cola shares could come under pressure if these recent volume declines were to continue.

Baker Hughes

The third and final US stock pick that isn’t reliant on the election result is Baker Hughes, which is a major equipment and services provider to the energy industry.

Recently, domestic activity amongst its oil & gas customers has fallen from the high levels reached during the US shale boom, owing to lower commodity prices and cost pressures.

However, Hargreaves Lansdown noted that the US only accounts for around one-quarter of the firm’s revenue, while it is well-positioned to benefit from the resurgence in deep water exploration and development offshore and overseas thanks to its expertise in subsea systems.

Performance of Baker Hughes vs S&P 500 over 5yrs

Source: FE Analytics

Nathan also suggested strong revenue momentum of Baker Hughes’ industrial & energy technology division, which is benefiting from the ongoing build-out of liquefied natural gas infrastructure, and the firm’s push to develop and sell more digital solutions across the client base as positives for the company.

“The order book is close to $33bn, meaning that it can deal with short-term lulls in commercial activity. This makes it less sensitive to energy price fluctuations than oil & gas producers, but it would still feel the impact if prices were weak for a prolonged period,” he finished.

“This is an exciting, emerging growth story, but that’s also reflected by a valuation towards the top of the peer group. It’s well deserved but means the shares are likely to be sensitive to any sustained weakness in order intake.”

A well-functioning portfolio isn’t necessarily one with a large number of holdings and investors who can only afford two funds shouldn’t be put off.

There are several ways to achieve diversification with just two funds. Previously, we covered core/satellite and multi-asset approaches and today we look at a traditional stocks and bonds portfolio.

Trustnet asked experts to pick an equity and a fixed-income fund that not only go well together, but are well suited for investors who don’t have the money, time or propensity to pick additional funds.

JPM Global Growth and Income and M&G Optimal Income

Quilter Cheviot head of investment fund research Nick Wood chose JPM Global Growth and Income and M&G Optimal Income, which he described as broad-based funds covering most of the market, with a consistent history of steady performance.

Performance of portfolio with 60/40 equity/bond split against index over 5yrs

Source: FE Analytics

JPMorgan Asset Management’s trust is a high-conviction portfolio, collating the firm’s favourite 50-90 companies on the basis of quality earnings that are growing faster than the market. Wood likes the 4% dividend, the very strong track record and the consistent team.

Conversely, M&G Investments’ fund, managed by FE fundinfo Alpha Manager Richard Woolnough, invests in a combination of government bonds and high-yield debt, while also holding up to 20% in equities, providing investors both income and capital growth.

“The portfolio is backed by M&G’s extremely experienced research team who enhance the manager's macroeconomics views through bottom-up credit analysis,” Wood said.

Trojan Global Income and a US government bond ETF

Fairview Investing director Ben Yearsley prioritised keeping costs low, which he achieved through an active and a passive fund.

“The way investors conceive fixed interest – whether as a diversifier or a return-seeking element – determines what sort of fixed interest vehicle to invest in,” he said.

“Normally I eschew passive bond funds in all but one specific area – US government bonds, which don’t offer a huge return but act as a good diversification tool.”

His choice here was the iShares USD Treasury Bonds exchange-traded fund (ETF), which provides broad exposure and is hedged back to sterling.

To sit alongside it, he suggested the quality-income strategy Trojan Global Income.

Performance of portfolio with 60/40 equity/bond split against index over 5yrs

Source: FE Analytics

He said: “The good thing about quality income as opposed to value-based income is that you should be able to hold through a cycle, especially when you consider that Troy’s approach focuses a lot of attention on capital perseveration.”

Janus Henderson Global Sustainable Equity and Muzinich Global Tactical Credit

Parmenion fund research manager James Clark would choose a sustainable global equity fund for the long to medium term, paired with a strategic bond fund that has a good degree of flexibility within global fixed income markets.

He picked Janus Henderson Global Sustainable Equity, a multi-cap strategy with a large-cap bias and a growth style, with a circa 90% active share against the MSCI World index.

“This is a core holding amongst our sustainable global equity funds at Parmenion,” Clark said.

“We like its highly-regarded manager Hamish Chamberlayne and its investment process centred on investing in companies with at least 50% revenue alignment with one of 10 positive themes (five environmental and five social), combined with a very robust exclusion criteria in place.”

His second choice was Muzinich Global Tactical Credit, a flexible global bond fund spanning sovereign bonds, investment grade and high-yield credit, as well as emerging market debt.

Performance of portfolio with 60/40 equity/bond split against index over 5yrs

Source: FE Analytics

Its mandate is designed to be very flexible, to achieve an absolute return over the market cycle.

“The fund’s portfolio is very well-diversified and its managers are able to employ some hedging techniques, aiding downside capital protection,” Clark said.

GQG Partners Global Equity and BlueBay Invetsment Grade Global Government Bond

Finally, Darius McDermott, managing director at FundCalibre, chose a pair that should provide “a balanced blend of growth and stability”.

The equity component was taken up by GQG Partners Global Equity, a concentrated portfolio of high-quality companies with strong growth potential.

It is managed by three FE fundinfo Alpha Managers: Rajiv Jain, Sudarshan Murthy and Brian Kersmanc.

McDermott was convinced by how forward-looking the fund is, focusing on companies with resilient, future-ready earnings, rather than those which have simply done well historically.

He favoured it as a nimble, growth-oriented fund, offering a solid foundation for a portfolio.

A “reliable anchor” to complement GQG is the BlueBay Investment Grade Global Government Bond fund.

Performance of portfolio with 60/40 equity/bond split against index over 5yrs

Source: FE Analytics

Its low-cost structure, close to that of a passive fund, makes it more feasible to achieve net outperformance after fees, according to the director.

“Government bonds offer steady income and serve as stabilisers during market downturns, given their typically negative correlation with equities. Now is a good time to take advantage of the generous yields available on these low risk assets – with yields on 10-year UK gilts and US treasuries currently exceeding 4%,” he said.

“While government bonds are often seen as a challenging area for active management to add significant value, this fund’s initial outperformance has suggested otherwise.”

Semiconductor stocks are becoming less cyclical because their end-clients have changed and are now mega-cap tech companies rather than individuals. This transformation is not yet fully baked into valuations, according to Stephen Yiu, manager of the LF Blue Whale Growth fund, who thinks share prices will continue to climb.

Semiconductor stocks possess “underestimated potential for alpha”, the FE fundinfo Alpha Manager said, with valuations that “should be trading higher than before over the medium term”.

Share prices will be determined by new dynamics going forward, primarily ‘silicon sovereignty’, which he described as the biggest theme out there.

Currently, over 90% of high-end semiconductors are produced in Taiwan by the Taiwan Semiconductor Manufacturing Company (TSMC), which is controlling the supply of the chips needed for producing the latest technologies. To reclaim their silicon sovereignty, Western governments have decided to re-shore their semiconductor capabilities – a “reversal of a historical decision due to the geopolitical uncertainties in Asia Pacific” which started with the US Chips Act in 2022.

Fast-forward to today, over $400bn has been committed to building new foundries in Germany, France, Ireland, Malaysia, many US states, South Korea and Japan – all of which will need tons of mission-critical equipment at a pace that “has never happened before in history”.

According to Yiu, this new growth, which will be more supply-driven than demand-driven, is going to provide enough tailwind to offset the headwind that the end market is facing and is the first reason why semiconductor stocks should re-rate higher.

His second point, which is linked to artificial intelligence (AI), is that the quality of the industry’s client base has improved. In 2019, about 50% to 60% of TSMC’s business was in the end market (smartphones) and just 30% in larger applications such as data centres and servers; today, that number has flipped.

The customer base has changed from consumers, who were spending on discretionary technology, to enterprises investing in AI – a stickier client than retail consumers, who are a dependant on the economic cycle.

Before 2022, Nvidia’s revenue was mostly determined by crypto miners and gamers who wanted to accelerate their computers. Today, thanks to AI, Nvidia’s customers are Apple, Microsoft, Amazon, Google and Meta – the biggest companies in the world with a lot of cash on their balance sheets.

“The quality and sustainability of the revenue stream is evolving as we speak. This should make demand for semiconductors less cyclical in the future", Yiu said. 

“We see all these changing dynamics as an opportunity. But if you look at valuations, the semiconductor companies are trading at similar levels as before, so the market has still not recognized the direction of travel.”

Despite these developments, the manager said the semiconductor industry will always retain a certain degree of cyclicality.

However, that's not necessarily a hurdle, with some managers trying to take advantage of that, including Julian Bishop, co-manager of Allianz’ Brunner investment trust, who bought ASML 18 months ago, when there was a big downturn in demand for its products.

Demand for semiconductors is currently in the foothills of the next upcycle, which could last through the middle of 2026, as the chart below shows.

Historical and estimated semiconductor demand

Source: BofA Global Research, Allianz. Data as at 12/2023.

“There's a shortage, prices go up and everyone over-bills. Demand overshoots and you get this big hangover, as customers stop ordering and microchips sales suddenly fall a great deal. That’s why historically, we have always had big downturns in the short term,” Bishop explained.

“Today, there's still a downturn,” he admitted. “But we are expecting demand to come back and there's great structural growth as well. These down cycles are an opportunity to pick up things at a good price.”

The US presidential election campaign, which culminates today, has been extraordinary – marked by Joe Biden’s withdrawal as a candidate, the assassination attempts on Donald Trump and the abandonment of various electoral norms. For all the drama, the election remains finely balanced – especially in the crucial swing states. An election that’s too close to call, but what impact will it have on the world’s financial markets?

Surprises from history

Received wisdom might suggest that wins by the Republicans – the ‘party of business’ – lead to the best outcomes for the US stock market. But history paints a somewhat different picture.

Although Donald Trump made great play of the S&P 500’s performance during his administration, the US market underperformed its Chinese counterpart on his watch.

The stock market outcomes from previous Republican administrations tell a similar story. During the presidency of George W Bush (Junior), both emerging markets and China outperformed the US equity market. And although the Chinese market wasn’t yet established as a destination for global capital, emerging markets also outperformed under George HW Bush (Senior).

By contrast, the US stock market outperformed its global peers under Joe Biden, Barack Obama and Bill Clinton.

It would be naïve to argue that these outcomes depended solely on the party affiliation of the president. As we shall see, the US Federal Reserve’s independent monetary policy tends to be much more significant for the wider world than whoever occupies the White House.

Nevertheless, US fiscal policy and other government initiatives have played a part in determining the relative performance of US and international equities – as have a range of external events.

The US as global rate-setter

Tighter monetary policy is a hurdle for the US stock market. But high US interest rates and a strong US dollar tend to weigh more heavily on the performance of international markets – and especially emerging market equities.

After a slight contraction in the first quarter of 2022, the US economy continued to grow robustly even as interest rates rose to reach their highest level in over 20 years. During that period, the US growth machine sucked in capital from around the world, attracted by higher yields, and the US equity market has priced itself on that basis.

Meanwhile, an increasingly digitalised economy is intrinsically less vulnerable to higher borrowing costs, which have less impact on businesses reliant on software rather than physical assets. With the Fed having now started to cut interest rates, the stage is set for further domestic dynamism after a period of remarkable resilience.

But the Fed is also the world’s interest rate setter. The 10-year US treasury bond is often seen as a benchmark for global interest rates. Higher US yields lure investors away from riskier assets (i.e., those outside the US), even as higher borrowing costs dampen economic growth in countries that lack America’s remarkable dynamism.

Conversely, when US rates and yields fall, they have a significant positive impact on international markets – emerging equity markets especially.

Contrasts and common ground

A win for Kamala Harris would create some uncertainties. We have scant indication of her views on trade and the economy, for instance. But clearly, a Harris presidency would mean a greater degree of continuity than a Trump one.

In a split with recent precedents, however, a Harris presidency could be more likely to be positive for international markets and emerging markets in particular. That’s because a continuation of Biden-era policies is likely to give the Fed room to bring down interest rates further.

Some of Harris’ policies could weigh on certain sectors of the US stock market. Her anti-monopoly proposals could affect some of the technology giants that have led the market in recent years. Healthcare companies and producers of fossil fuels would also feel pressure from government policies on pricing and the environment, respectively. Against this, the consumer sectors would be likely to benefit from Harris’ proposed tax relief for lower earners.

Under a second Trump presidency, a key concern for global investors would be his proposals for higher tariffs, especially on Chinese goods. These would be likely to have an inflationary effect and could potentially arrest the Fed’s nascent rate-cutting cycle. This would result in renewed strength in the dollar, with the negatives for emerging markets that that entails.

The policies that Trump has outlined would have roughly the opposite effect to Harris’, with support for fossil fuels and big tech at the expense of the consumer, who would be hurt by the higher inflation caused by tariffs.

There are commonalties too. Both candidates look set to increase the US deficit; the Fed appears unalarmed by this. And both are proposing extensive tax cuts, albeit with different targets.

What comes next?

Despite all the excitement and uncertainty surrounding the election, our focus in the coming months will be on the Fed rather than the White House. The winner of the Electoral College is unlikely to be a major factor when the Fed’s Open Markets Committee mulls over what action to take at its November and December meetings.

Political rhetoric does not always become reality and the new president’s policies will take time to feed through into the hard data that informs the Fed’s decisions.

For investors, the worst outcome could be either party winning complete control of the legislature and executive – removing the checks and balances that come with a split. But in recent US history, ‘unified’ government tends to be fleeting; it has occurred in just six of the past sixteen years.

This has important implications. A lack of Congressional support could impede Trump’s programme of tariffs. More broadly, a split Congress would be likely to lead to more ‘horsetrading’ and consensus-building, with, eventually, more moderate outcomes.

Either a Harris presidency or a Congress-constrained Trump should leave the Fed room to loosen monetary policy further in the coming months. And from their current elevated levels, US interest rates have a long way to fall.

Lower US rates and, consequently, a weaker US dollar should feed through to lower rates worldwide and growing interest in the potentially higher returns on offer in emerging markets.

Lending from foreign banks to emerging market companies usually rises when lower US rates make such loans more attractive, allowing economic activity to accelerate.

A weaker dollar also tends to raise demand for commodities such as oil and metals, boosting both their prices and the equity markets of the countries that produce them – many of which are emerging markets.

For these reasons, falling US rates have historically translated into stronger returns from emerging market equities, which typically outperform their developed counterparts during rate-cutting cycles.

One exception might be China. The fortunes of the world’s largest emerging market are increasingly dependent on domestic drivers rather than external forces. We are still waiting to see how Beijing’s recent stimulus measures will play out beyond the initial excitement; in the meantime, investors might be best advised to consider China separately from other emerging markets.

Finally, a sustained rate-cutting cycle in the US is also likely to benefit mid-cap stocks in many markets. Mid-cap stocks tend to respond more vigorously to rate cuts than their large-cap peers – not only because they tend to have a greater proportion of floating-rate and shorter-term loans, but because they benefit from the unleashing of animal spirits as investors take heart and allocate away from bigger, safer choices.

We have already seen signs of this in the US, where the stock market rally has begun to broaden out beyond the mega-cap tech stocks to areas where valuations are less eyewatering. Once the dust from the US presidential race settles, there could be much more of this to come around the world.

Michael Browne is chief investment officer of Martin Currie. The vies expressed above should not be taken as investment advice.

Investors are split on the outlook for gilts in the wake of the volatility that followed last week’s Budget, but analysts at Hargreaves Lansdown think investors should consider locking in the higher bond yields currently on offer.

Gilts yields have been rising – and therefore prices falling – since mid-September for a few reasons, with one being uncertainty around the first Budget of the new Labour government.

Bond investors were nervous about expectations of higher future borrowing. This, along with factors such as interest rate expectations and the US election, meant the yield on 10-year gilts had risen to around 4.3% the day before the Budget.

Yields climbed further after chancellor Rachel Reeves finished her Budget speech last Wednesday, in which she announced £40bn in tax hikes and new fiscal rules that allow more government borrowing.

At the time of writing, six days after the Budget, the 10-year gilt yield was around 4.47%.

Performance of gilt prices over 2024

Source: FE Analytics

The volatility of the gilt market has left investors spilt in their outlooks.

Althea Spinozzi, head of fixed income strategy at Saxo, said investors should stay bearish on UK government bonds following the announcements in the Budget.

“Looking ahead, there are compelling reasons to anticipate that gilt yields may continue to rise,” she said.

“Inflationary pressures stemming from the budget – such as higher minimum wages and increased employer National Insurance contributions – could prompt markets to expect a more cautious approach from the Bank of England concerning rate cuts.

“This mix of increased inflation risks and higher supply expectations is likely to exert sustained upward pressure on yields over the longer term.”

However, BlackRock Investment Institute UK chief investment strategist Vivek Paul welcomed the measures in the Budget, arguing that they are “an attempt to turn around the UK's economic fortunes”.

He said that by creating headroom for more government borrowing but not using it all at once, Reeves is trying to signal to markets that there is a runway to support growth further but spending will be used “judiciously”.

BlackRock remains overweight UK equities and gilts, citing the UK’s relative political stability thanks to the summer's decisive election result and its view that the Bank of England is likely to cut rates more than markets currently think.

Hal Cook, senior investment analyst at Hargreaves Lansdown, sees some merit to investing in bond funds at the moment despite the tick-up in volatility and the forecast this will continue into 2025 on shifting interest rate expectations and political instability.

“With the 10-year gilt and US treasury yields both still above 4%, bonds are broadly as attractive today as they’ve been all year,” he explained.

“Taking a long-term view, it’s likely that yields will be lower than 4% in future, meaning investing in bonds today gives the potential for capital gains as well as receiving the income that they provide.”

For investors thinking of buying a bond fund, Cook gave three strategies to consider.

Performance of funds over 2024

Source: FE Analytics

First up was L&G All Stocks Gilt Index Trust, which tracks the broad movement in prices of all gilts currently in issue. Cook described it as a cheap and easy way to take exposure to the whole gilt market.

“It’s a great option for investors who are looking for specific exposure to gilts,” he said. “However, while it invests in lots of different gilts, as it is only invested in UK government debt, it is relatively concentrated compared to the wider bond market.”

He also pointed to Shalin Shah and Matthew Franklin’s Royal London Corporate Bond fund for investors who want to diversify a portfolio focused on shares. Most of the portfolio is in investment grade bonds, with some higher risk, high-yield bonds.

“[Shah and Franklin’s] edge comes from deep analysis of individual bonds, looking for those that offer higher returns. This can lead them to invest in bonds issued by companies that could be considered higher risk than peers,” Cook explained.

“But the individual bond analysis conducted by the managers means they are comfortable that any additional risk being taken is well rewarded.”

For investors seeking a more flexible approach to fixed income, the Hargreaves Lansdown senior investment analyst suggested Stuart Edwards and Julien Eberhardt’s Invesco Tactical Bond fund.

It invests in all types of bond and has the aim of generating both growth and income over the long term, with a focus on minimising loses during times of market stress.

“[Edwards and Eberhardt’s] focus on limiting losses has meant that their fund has typically had less ups and downs than the wider market,” Cook said. “Their active management approach also means they can stay away from areas of bond markets that they think could perform poorly, and means the fund is highly diversified.”

He said Invesco Tactical Bond could be a good option for investors seeking a fund that can take advantage of market volatility.

The Financial Conduct Authority (FCA) plans to permit asset managers to pay for sell-side research and trade execution in a single all-in fee, reversing MiFID II ‘unbundling’ rules.

The regulator has set out proposals and launched a consultation today to seek feedback from the investment industry, which will close on 16 December. If it chooses to proceed, any rules or guidance will be published in the first half of next year.

The proposals follow recommendations from the UK Investment Research Review in July 2023, which highlighted the “paucity of research coverage of smaller-cap companies” and argued that ‘bundling’ has enabled the US to produce superior research to the UK.

As a first step, institutional investors were granted greater flexibility on how they purchase investment research in July. The FCA said it now wants to make it easier for fund managers to “buy insight and analysis across borders”.

Before the financial crisis, it was standard practice for asset managers to receive investment research from the broker/dealers they used for trade execution. Brokers would charge buy-side firms a margin on top of the actual costs of executing trades and would provide additional services such as research or technology.

According to the UK Investment Research Review, UK regulators were concerned that this system made the cost of transactions opaque and that it gave rise to conflicts of interest because fund managers might use a broker to benefit from its additional services rather than because it provided the best trade execution for their clients.

Between 2006 and 2018, the FCA banned bundled payments for anything other than research and introduced further restrictions.

Then in 2018, the EU’s revised Markets in Financial Instruments Directive (MiFID II) required asset managers to pay for sell-side research separately.

In the US, however, bundled pricing is still permitted. The UK Investment Research Review argued that this system has enabled US research to become superior to the UK because banks and brokers have been able to invest more in research, retain more senior analysts and develop broader coverage, extending to small-caps.

“There is a widely held (but not uncontested) view that the decline in research budgets for sell-side research following the introduction of MiFID II appears to have led to a ‘juniorisation’ and reduction in the number of sell-side investment analysts, which has impacted the quality of research in the UK, both by reason of the experience of analysts and the number of companies they are expected to cover,” the review stated.

This is what the FCA’s proposals now seek to address. Jon Relleen, director of supervision, policy and competition at the FCA, said: “We want UK markets to be efficient and to support economic growth. Putting more information in the hands of investors and giving investment firms greater access to research to inform their strategies will bolster UK markets.”

Asia Pacific continues to be a volatile region for investors. While emerging market and Asian funds have been long out of favour, developments this year such as an improved economic backdrop and the recent stimulus package in China have kick-started a new wave of interest.

Year to date, emerging markets have done quite well, rising by 10.6%. By comparison, this is eight percentage points below the performance of the S&P 500, although it surpasses the Euro STOXX 50 and the FTSE All Share.

Performance of indices year to date

Source: FE Analytics

As with any region, investors are keen to ensure they are seeing the maximum returns for the risks they take. In emerging markets, the more defensive strategies thrived, achieving high returns while taking low to moderate risks.

In the final part of our ongoing series, Trustnet analyses the funds that have struck the best balance between risks and rewards over the past five years by comparing their Sharpe ratios and returns.

Today, we end the series by looking at the funds with the best risk-adjusted returns in emerging market equities and Asia Pacific.

Risk-adjusted returns of IA Global Emerging Market funds over 5yrs

Source: FE Analytics, total returns in sterling, data to 31 Oct 2024

In the IA Global Emerging Markets sector, many funds enjoyed an above-average return on investment. In particular, the £2.2bn GQG Partners Emerging Market Equity fund stood out due to its low-risk approach compared to its peers.

With a 12.7% volatility over the past five years, it was one of the sector’s most risk-averse funds, ranking in the first decile. Despite taking on relatively low risks, the fund did not sacrifice its ability to deliver strong performance, rising by 51.1% - the fifth-best performance in the 141-strong sector.

Performance of fund vs sector and benchmark

Source: FE Analytics

As a result, the fund enjoyed the sector's second-best five-year Sharpe ratio of 0.4.

Moreover, the fund’s strong relative performance has continued, with first-quartile returns over the past three years and one year.

Additionally, the fund enjoyed the second-best ranking for alpha generation in the sector, with an average of 5.5% over five years. This indicates that despite being a relatively less volatile strategy, it was still able to deliver beat the benchmark by a wide margin.

Risk-adjusted returns of IA Asia Pacific Including Japan funds over 5yrs

Source: FE Analytics, total returns in sterling, data to 31 Oct 2024

Next, we move on to the IA Asia Pacific Including Japan sector, in which the £330m Invesco Pacific (UK) fund was the only portfolio that matched our criteria.

Led by Tony Roberts and FE fundinfo Alpha Manager William Lam since 2013, the fund climbed by 49.7% over the past five years, the best performance in the peer group. Over the longer term, it has continued this record with a 10-year performance of 150.8%, also placing it as the best-performing fund in the sector.

Performance of fund vs sector over 5yrs

Source: FE Analytics

Similarly to the GQG Partners portfolio, it achieved this while being one of the most cautious funds in the sector, with a top decile five-year volatility of 12.8%. This combination of low risks but impressive returns generated a Sharpe Ratio of roughly 0.38 over half a decade.

Moreover, in this period it proved to be one of the best funds at generating excess returns, with 3.9% alpha on average, the single best result in the sector.

Risk-adjusted returns of IA Pacific Excluding Japan funds over 5yrs

Source: FE Analytics, total returns in sterling, data to 31 Oct 2024

Finally, we turn to the IA Asia Pacific Excluding Japan sector. In this peer group, it was a more aggressive strategy, the £101m Matthews Asia Discovery fund, which stood out.

The portfolio rose by 76.2% over the past five years, the best result in the sector by over 13%. Paired with a modest sixth decile volatility of 15.9%, the fund has enjoyed the best five-year risk-adjusted returns of 0.53.

Performance of the fund vs sector and benchmark over 5yrs

Source: FE Analytics

Longer-term it also achieved first-decile results, surging by 147.2% over the past decade.

Looking at its ratios, it proved to be one of the best strategies for protecting clients’ investments. With the third-best maximum drawdown of -18.3% and the fifth-best maximum gain of 21.1%, it proved to be one of the best funds in the sector over five years.

However, the portfolio has struggled recently and was the worst performer in the peer group over the past year.

In the rest of this series, we have looked at the IA European and European Smaller Companies,  IA Mixed Investment and Flexible Investments,  IA North America, IA Global and the IA UK All Companies sectors.

M&G plans to merge three of its sustainable multi-asset funds into its Episode range, leading Square Mile Investment Consulting and Research to strip them of their ratings.

In a letter to investors, M&G said the £48m M&G Sustainable Multi Asset Cautious, £53m M&G Sustainable Multi Asset Balanced and £27m M&G Sustainable Multi Asset Growth funds will be merged away due to their small sizes.

“The merging funds have not attracted the expected level of interest from investors and as a result have not attained the size required to make them commercially viable,” M&G’s letter said.

“Following a review, we’ve concluded that there is little prospect for the funds’ growth in the foreseeable future.”

The plans are subject to shareholder approval and will be voted on at an extraordinary general meeting on Wednesday 6 November 2024.

If approved, M&G Sustainable Multi Asset Cautious and M&G Sustainable Multi Asset Balanced will be merged into the M&G Episode Allocation fund, while M&G Sustainable Multi Asset Growth will merge into M&G Episode Growth. This will take place on Friday 22 November 2024.

“The merging funds and the receiving funds included in this proposal are all globally invested multi-asset funds managed by M&G’s experienced multi asset team,” M&G said.

“The receiving funds, although not sustainability related funds, have been selected based on them sharing similar investment and risk characteristics as their respective merging funds and we believe the mergers to be the best option for investors as an alternative investment solution for the long term.”

Square Mile said it was “disappointed” to have to remove the three funds’ Responsible Positive Prospect ratings because of the plans.

In other moves, Square Mile has stripped the A rating from Jupiter Global Value Equity, following the departure of managers Ben Whitmore and Dermot Murphy earlier this year.

Whitmore and Murphy have launched a new boutique – Brickwood Asset Management – but will not run Jupiter Global Value Equity strategy on a sub-advised basis.

Square Mile explained: “Whilst the analysts acknowledge that the appointment of Brian McCormick as the fund’s lead manager represents some continuity of approach and ensures that the mandate remains internally managed by Jupiter, the fund’s A rating was predicated on the expertise of Whitmore and Murphy.”

Meanwhile, the CT Managed Equity & Bond, CT Managed Equity Focused and CT Managed Equity funds have retained their A ratings, having been under review since it was announced that manager Alex Lyle is to retire in April 2025.

Square Mile noted that the funds are managed with a team approach, co-manager Matthew Rees will continue to work on them and there are no changes to the investment approach, therefore the analysts are “comfortable retaining their ratings”.

The ratings agency has also awarded A ratings to The Diverse Income Trust (“an interesting option for investors seeking to diversify their sources of income from UK equities”) and JPM Europe Equity Absolute Alpha (“its returns are lowly correlated to stock market indices and the fund has an impressive record of protecting investors’ capital in stock market downturns”).

Schroder Global Sustainable Value has awarded a Responsible A rating. Square Mile said it offers a strong value investing proposition that is differentiated from many other sustainable funds, which tend to have a growth bias.

Finally, Fidelity UK Smaller Companies fund has been upgraded from A to AA rating while Fidelity MoneyBuilder Dividend and Fidelity Enhanced Income funds were upgraded from Positive Prospect to A ratings.

Investors should be familiar with the risk/reward equation – you have to take risks to have any chance of getting the reward.

This Bonfire Night, Trustnet asked experts which funds they would pick to reach the sky, with the reassurance that for as daring as they might seem, none will be as risky as the infamous plot to blow up Parliament.

For investors who like to plot in the dark and are always siding with the underdogs, Laith Khalaf, head of investment analysis at AJ Bell, chose the Fidelity China Special Situations trust, which he said should be a good option to add some spark to well-diversified portfolios.

Performance of fund against sector and index over 1yr

Source: FE Analytics

Manager Dale Nicholls looks for cash-generative companies that offer long-term growth prospects and are trading at attractive valuations. The smaller-companies tilt “adds to the risk of the fund but also opens up the possibility of higher returns from a fast-moving area of the market”, Khalaf said.

The manager draws upon the resources of Fidelity’s sizeable analyst pool, including 13 analysts specifically dedicated to China, Khalaf pointed out.

“The Chinese stock market has been on a bit of a rollercoaster ride of late, but investors have broadly responded positively to economic stimulus coming from the central government,” he said.

“The Chinese stock market can be vulnerable to government intervention, but it will also respond to global factors, in particular more defensive US and European trade policies. Investors lately seem to have turned their attention towards India, which has been seen as the next big thing, so China represents a bit of an underdog story at the moment”.

Investing in a single country, however, even one as large as China, comes with “a large risk warning” so this first pick should only be considered by investors with all the main regional bases covered, Khalaf warned.

Lovers of British traditions like Bonfire Night might also love UK smaller companies portfolios such as Tellworth UK Smaller Companies, a higher-volatility option selected by FE fundinfo deputy chief investment officer Charles Younes.

Performance of fund against sector and index over 1yr

Source: FE Analytics

The fund comprises, approximately equally, growth and value stocks with strengths in four main areas: product, market leading, margin and management team.

FE fundinfo Alpha Managers John Warren and Paul Marriage exclude a few areas, such as oil and gas, mining and biotech, but otherwise don’t follow a benchmark closely, preferring a bottom-up selection of 40 to 60 stocks in the portfolio.

Younes likes their bottom-up style, with an emphasis on meeting management teams and “understanding the businesses they invest in deeply”. This is further differentiated from peers as they are looking “outside typical growth stocks” at more unloved areas of the market.

For higher-risk, higher-return opportunities across the globe, Younes picked the Baillie Gifford Global Discovery fund.

Performance of fund against sector and index over 1yr

Source: FE Analytics

The team, led by Douglas Brodie, focuses on companies’ fundamental characteristics, favouring strong management teams and innovative products, which can generate sustainable profits to fund future growth opportunities, Younes said.

The fund has a high number of positions below 0.5%, which represent the riskier ideas in the portfolio that may or may not work out.

“It doesn’t add to these names, but lets them climb or fall based on performance, which helps to mitigate some of the risks associated with investing in smaller companies by minimising the impact from a potential bad investment,” Younes said.

Although in isolation the fund is high risk, it could be suitable as an addition to an already-diverse global-equity allocation that is lacking smaller company exposure, the CIO concluded.

Still within global equities, Rob Burgeman, investment manager at RBC Brewin Dolphin, said that from weight loss drugs to vaccines, healthcare is currently undergoing “radical changes”.

According to him, an ideal way of participating in this revolution is through the Janus Henderson Global Life Sciences fund.

Performance of fund against sector and index over 1yr

Source: FE Analytics

It invests at least 80% in shares of life-sciences companies of any size and in any country, preferring those that are addressing unmet medical needs or seeking to make the healthcare system more efficient.

Managers Andy Acker and Daniel Lyons aim to maintain a balanced portfolio across subsectors such as biotechnology, healthcare services, medical devices and pharmaceuticals.

“Picking winners in this space can be very difficult, so this fund is an ideal way to gain exposure to the wider industry and the tail winds propelling it forwards,” said Burgeman.

Finally for a more specialist pick, Momentum Global Investment Management senior research and portfolio analyst Gregoire Sharma went for the Global Evolution Emerging Markets Blended High Conviction fund.

This high-conviction, blended EMD strategy is a best-ideas collection form various portfolio managers at Global Evolution, with a static 25% allocation to sovereign hard currency debt, sovereign local currency debt, corporate hard currency debt and frontier local currency debt.

Since inception in 2022, it delivered a 33.7% return gross of fees, beating many of its peers.

“The strategy has been very successful, outperforming both in bull months and bear months. When the market turns negative, frontier positions tend to outperform, whereas when it turns positive, hard currency tends to outperform,” Sharma said.

“Given frontier markets are so under-researched relative to more ‘vanilla’ EMD asset classes, they offer significant opportunities for outperformance.”

Investing is a delicate balancing act. Many investors try to walk a careful tightrope between risk and reward, but for Shaniel Ramjee, co-head of multi-asset at Pictet Asset Management, the balance has tipped too far in one direction.

For Ramjee, investors have become too cautious and unwilling to take the chances necessary to thrive in difficult environments. As investors continue to search for greater returns, they will find themselves struggling if they continue to avoid the more volatile sectors.

“Investors need to be aware that investing for real returns is the only way to secure long-term financial security, and being too defensive will hinder that,” he said. “We do think that investors, by and large, have become too risk averse.”

He attributed this caution to several factors, particularly people’s fixation with cash.

Rising interest rates have made cash more attractive in recent years, but interest rates will dampen the returns available, Ramjee commented, making other asset classes far more appealing.

Indeed, while funds in the IA Standard Money Market sector have seen modest growth year-to-date (YTD), rising by an average of 4.39%, other asset classes have enjoyed similar or even better growth, with the IA UK Equity Income sector up by 8.2%.

Performance of sectors YTD

Source: FE Analytics

For Ramjee, overreliance on cash has blinded investors to the significant opportunities available from other, more volatile asset classes.  

“While cash rates may have looked appealing, it was not the best decision for many investors, who should have been looking at investing in the wider financial markets and across the capital structure,” he said.

“Not only is cash not king, but it could also prove to be the joker in the pack”.

What other asset classes should investors turn to?

Despite recent surges in volatility, it has been a good year to be an equity investor. The S&P 500 is up by 19.4% despite experiencing one of the largest sell-offs on record in August.

Performance of indices YTD

Source: FE Analytics

Additionally, with further rate cuts expected from central banks this year, Ramjee expects a wider variety of companies to benefit, leading to more varied long-term opportunities for investors willing to venture into the stock market.

Moreover, for Ramjee, equities provide investors with exposure to the “real economy” and serve as an essential diversifier despite being relatively high-risk. As he puts it, returns from equities reflect real market activity and developments.

For example, if inflation is persistently high, that will be reflected in dividends, earnings and capital appreciation of companies. Similarly, when inflation declines, returns on equities will shift in response.

“We think all investors, over the long run, should have some exposure to the real economy. Equities are still one of the best places for long-term savers to invest their money,” he stated.

Ramjee also drew attention to the fixed income market, in particular corporate bonds. As a higher-risk asset than cash, bonds remain a great diversifying addition to a portfolio, providing market exposure without taking on too much risk.

Spreads (the additional yield on corporate bonds compared to government bonds) are tight but nonetheless, corporate bonds have still outperformed government debt this year.

Funds in the IA Global Corporate Bond peer group enjoyed growth of 2.8% YTD, while portfolios in the IA Global Government bonds sector slid by 2.3%.

Performance of sectors YTD

Source: FE Analytics

Ramjee attributed this to corporations’ fiscal caution compared to governments, which have accrued significantly inflated balance sheets. Take for example the US, which is facing a national debt of over $35.8trn.

“The creditworthiness of corporates we believe, will remain much stronger than that of governments around the world,” he added.

Ultimately, higher returns can only be achieved by taking more risks and diversifying away from cash. "Investors just don't invest enough," Ramjee concluded.

Do elections matter? Of course they do. Elections can change all sorts of things: how we live, access to healthcare and education, the regulations businesses must abide by and how much money is in our pockets at the month’s end.

For equity managers, the critical questions are: what do elections mean for stock picking? Do they influence whether the market goes up or down? By how much?

However, evidence shows that a selective stock-picking manager can thrive, whatever the political climate.

Reviewing returns

The average annual price return for the S&P 500 going back six decades is about 8%. In the year after a presidential election, the number is… just under 9%. In the year prior, it’s about 8%. There is significant volatility year by year, but nothing suggests these years stand out from any other.

Even volatility isn’t significantly different from the norm in these years: the average standard deviation from the annual price return is about 15%, with the number before an election 16% (i.e. a little more), and after 13.5% (i.e. a little less).

Perhaps these averages mask something important.

What about Republicans versus Democrats? It may be tempting to assume low-tax, low-regulation Republicans are a stock market winner, but the data doesn’t show that.

The average annual price return during a Republican presidency is about 5%. During a Democratic presidency, it’s 11%.

In the year after a Republican victory, the average price return is 3%. After a Democratic win, it’s 15%.

However, these figures are distorted by big one-offs. George W Bush’s election coincided with the dotcom bubble’s burst, leading to a 22% market drop over the year following the result. In the 12 months after Joe Biden’s win, the market surged 38% in a trading environment distorted by the lifting of Covid lockdowns.

Challenging assumptions

The argument above implicitly implies it is the economy that drives markets, which in turn is driven by politics. 

But the relationship between the strength of economic growth and market returns is shaky at best. Between 1900 and 2022, the US economy grew more than any other country. However, that didn’t translate into the best stock market returns.

The US market returned about an average of 6.5% a year over the period. However, South Africa’s stock market beat it, achieving a 7.2% return despite pedestrian economic growth. When translated into US dollars, the returns of the two countries are about the same. But on this common currency basis, Australia comes out on top.

If you switch the starting point to 1998, the S&P 500 has made an impressive gain, returning just shy of 500%. However, over this timespan, it’s trounced by the Dow Jones Denmark, which returned just over 1,500% in US dollar terms despite slower economic growth.

Of course, starting points matter when making such comparisons. This is a key point: one reason index returns deviate from economic performance is that the former depends on starting valuations, which are a proxy for investor sentiment about a country’s stock market prospects.

However, there are two further reasons. First, much of a stock market’s return is driven by overseas revenues. For the S&P 500 today, international sales are approaching 40% of the total. Second, the stock market mainly accounts for large public businesses, ignoring private and smaller companies, let alone government spending.

Therefore, even if we assume that presidents influence economies, they aren’t a decisive factor in driving markets. Which begs the question: what does matter?

The short answer is innovation and entrepreneurship. The stock market is, after all, merely a collection of companies. Furthermore, it tends to be driven by the outsized successes of a few big winners.

What is game-changing from a long-term perspective?

Perhaps the sharpest way to demonstrate this is to take hotly contested issues of the past and contrast them with important technological advances and company launches.

What mattered more in 1976, the fallout from Watergate or Apple’s founding? In 1996, was it the role and size of the federal government or Larry Page and Sergey Brin launching Google? Should investors have paid more attention to 2004’s immigration debate or wondered about Facebook’s potential?

Politicians may debate the appropriate level of taxation or regulation for already profitable businesses. This can affect discounted cash flows (which some investors use to determine an asset’s current value based on forecasts of how much money it will make in the future).

However, for a company such as Novo Nordisk, which derives most of its revenue from the US, it is its impressive collection of accumulated diabetes and obesity knowledge stretching back over 100 years, and the enormous size of this market, that matters most to long-run stock returns. Not who sits in the White House.

Another example is Aurora, a company pioneering autonomous trucks. Adapted vehicles can drive through the night without risk of driver exhaustion and in the most fuel-efficient manner. As this technology matures, the implications are profound for the efficiency and safety of our transport networks. Regulations may take time to catch up, but the long-term result is as inevitable as an Aurora vehicle reaching its destination.

Infrastructure outliers

Some sectors seem more susceptible to politics than others. Finance, for instance, is heavily regulated. Infrastructure also counts politics as its ultimate source of demand.

Policy often determines the exact dollar amounts and timings regarding infrastructure investments. However, that policy is often the product of long-term trends.

Part of the reason infrastructure investment is a broadly bipartisan issue today is because the effects of its deterioration are widespread. Things will change, no matter who’s in the Oval Office. Still, it pays to be selective and to look for companies with the best potential for outperformance.

Where does burgeoning, long-term demand meet other stock-specific attributes? One answer is Stella-Jones, a maker of telegraph poles, among other wooden products. Stella controls most of North America’s supply, making it vital to upgrading and maintaining power and telecommunication networks.

Even if demand for its poles moderated to only a sustainable replacement level, there would be a shortage. Moreover, supply can only expand slowly, so Stella-Jones can charge good prices.

A stock picker’s advantage

We have no special insight into who will win this week or in any other election. But we do regarding revolutionary medicine, autonomous trucks and telegraph poles.

Indeed, it is much easier to step back and ask: what’s really changing? Where are the fires of innovation and entrepreneurship burning the brightest?

The selective stock picker can follow that light to outsized returns and leave the political crystal ball gazing to others.

Michael Taylor is an investment manager at Baillie Gifford. The views expressed above should not be taken as investment advice.

The price of Brent crude oil has fallen significantly in the past 12 months, oil stocks have lagged the broader market and the sector has been shunned by investors concerned about environmental, social and governance (ESG) factors.

Despite this, more than half (56.8%) of funds in the IA UK Equity Income sector count Shell as a top 10 holding while 45.9% can say the same for BP. Retail investors are piling in as well; BP was the most bought stock on interactive investor’s platform in October.

BP has had a particularly bad year, culminating last week in its worst quarterly results since the pandemic. Its share price is down 18.4% year-to-date, according to Google Finance. Shell has fared better and is up 1.6% year-to-date, as of mid-morning today.

Both stocks rose this morning on news that OPEC would delay hikes in output through December, giving oil prices a lift, said AJ Bell investment director Russ Mould.

With geopolitical tensions on the rise, supply/demand imbalances working in energy companies’ favour and valuations outside the US at attractive levels, this might be a good time for contrarian investors to take a fresh look at the sector, he suggested.

Demand for oil is growing but supply is constrained

Demand could surge in the US especially, Mould argued: “The US Strategic Petroleum Reserve is still diminished, at 385 million barrels, way below its 714-million-barrel capacity, after the Biden administration’s liquidation of assets to try and cap fuel and gasoline prices for US consumers. At some stage it would make sense to top this back up, especially at a time when energy supply could be a matter of national security.”

But while demand is robust, supply is constrained. “Drilling activity remains subdued, thanks to the pricing environment and the combination of political and public pressure,” he noted.

Redwheel’s Ian Lance, who manages the Temple Bar investment trust, said the capital expenditure of the 50 largest oil companies in the world today is half that of 2013, so companies are investing less, even though “demand for fossil fuels this year is at an all-time high”.

“We sometimes refer to this as a capital cycle thesis, where supply is not growing, but demand continues to grow,” he said.

The energy transition is weighing no BP

Long term, the transition to renewable energy should dampen demand for oil but that has not happened as quickly as expected, Lance said.

Of all the oil majors, BP “went heaviest on the energy transition”, said AJ Bell's head of financial analysis, Danni Hewson. Paradoxically, it has been penalised for this.

US oil majors, which have performed better, have taken a “more pragmatic approach”, making no plans to move out of hydrocarbons, having no interest in renewables and focusing instead on complimentary areas like carbon capture and hydrogen, she said.

Lance added: “US companies have been merging and buying other oil and gas producers, so they have not invested so much in the transition. They've continued to invest in oil and gas and therefore they've remained very profitable. They've been using that money to buy back their shares.”

Recently, BP and Shell have started to move in the direction of their US peers, he continued. They have dialled back their spending on renewable energy, invested in upstream oil and gas, and bought back shares.

Shell has outperformed BP, Hewson said, because it built a long-term strategy around natural gas, which is seen by some as a bridge between more polluting fossil fuels like coal and oil and renewable energy.

Reasons to invest in oil companies

Imran Sattar holds Shell in the Edinburgh Investment Trust but admits it is not his highest conviction idea. Oil companies are price takers – they are dependent on commodity prices which they do not control – whereas he prefers to invest in price-making businesses. However, Shell plays two roles in his portfolio – to generate income and diversify the trust’s economic exposure.

Another compelling reason to revisit Shell and BP is their valuations. They are trading on 7x earnings, with a 15% free cash flow yield and dividends of 4.2% and 6.5%, respectively.

Jonathan Waghorn, portfolio manager of Guinness Global Energy, said another way to look at valuations is the implied oil price as a barometer of the expectation priced into oil companies.

“At the end of September, we estimated that the valuation of our portfolio of energy equities reflected a long-term oil price of around $66 a barrel,” he said. This is significantly lower than the ‘normalised oil price’, which would allow supply and demand to be broadly in balance going forward, and which he believes is around $80 per barrel.

“If the market were to price in a long-term oil price of $80 a barrel, it would imply around 50% upside [to his fund’s portfolio]. Assuming an average Brent oil price of $80 a barrel in 2024, we estimate a free cash flow yield of over 10% for our portfolio.”

Guinness Global Energy is overweight European integrated oils, Canadian integrateds, equipment and services. “We believe that a new investment cycle in oil and gas is required and that our overweight service exposure will be a key beneficiary of increased spending in the sector,” Waghorn explained.

In Europe, the fund is overweight Eni, Repsol, OMV, Galp and Equinor, which are trading at valuation discounts to their global peers and are offering significant free cash yields at current share prices, he continued.

Canadian integrated oil stocks are cheaper than US counterparts thanks to lower Canadian regional oil prices. Conversely, the fund is underweight Exxon and Chevron, which trade at a significant premium to European majors.

A record amount of money was pulled out of equity funds in October as UK investors were spooked by the capital gains tax (CGT) hike in the Labour government’s first Budget, data from Calastone reveals.

The global funds network’s latest Fund Flow Index shows investors withdrew a net £2.71bn from funds in October, with every category of equity fund posting outflows during the month.

Calastone noted that October’s outflows followed a weak September, which itself had seen the first net redemptions since October 2023. Sell orders surged 36% month-on-month but then dropped 40% overnight as the CGT hikes took effect on 30 October, the day of the Budget.

Net flows – equity funds

Source: Calastone Fund Flow Index – Oct 2024

Buying activity also rose sharply in October, which suggests the reinvestment of some of the proceeds of fund sales after the capital gain had been booked.

Edward Glyn, head of global markets at Calastone, said: “Fears of a capital gains tax grab in last week’s Budget spurred investors to book their profits and crystallize a lower tax bill well before the chancellor rose to her feet in the Commons. Unease in September meant the early birds took fright first, but by October investors were flocking for the exits.”

In the Budget, chancellor Rachel Reeves increased the higher rate of CGT from 20% to 24%, while the lower rate for basic-rate taxpayers was lifted from 10% to 18%. She emphasised that the UK still has the lowest CGT rates among European G7 nations, even after these increases.

The hike is intended to help address the government's fiscal challenges but has been viewed as a blow for investors. The chancellor’s increase has not aligned CGT with income tax rates, which had been a widely discussed possibility before the Budget announcement.

Sell order value – equity funds

Source: Calastone Fund Flow Index – Oct 2024

Glyn added that there were “no major catalysts” in global markets that could have sparked such flight from funds. While indices drifted lower in the second half of October on the back of rising bond yields, “there were no alarming moves”.

“Instead, sharply higher selling by investors based here in the UK suggests the net outflow (the difference between the buying and selling) was driven by a motivation to book profits after strong market rises this year,” he explained.

“Moreover, October’s robust buying activity indicates that investors were also happy enough to reinvest much of the proceeds of their sales back into funds. The startling change in behaviour between 29 October and Budget day is a clear indication that tax was the main motivation for all this activity.”

The Calastone Fund Flow Index shows that UK assets were hardest hit by October’s outflows. Some £988m – more than a third of the total – was pulled out funds focused on UK equities. This was their fourth worst month on record.

Another quarter (£733m) came from equity income funds, which are skewed towards the UK stock market. It was the third worst month for income funds.

What’s more, October was the first month in more than two years when UK investors withdrew cash from global equity funds and the first month in more than a year for money to come out of US equity funds.

“With US markets and global markets having risen strongly over the last year, this is a further indication that booking gains for tax purposes was a key motivation,” Calastone added.

However, fixed income funds had their best month since June 2023 even though bond yields have surged in recent weeks. This follows investor caution of the depth of interest rate cuts now expected from the Federal Reserve and concerns around higher government borrowing in the UK.

Higher bond yields mean lower bond prices, but also creates an opportunity for newly invested capital to lock into these yields.

There were few days of outflows from fixed income funds in mid-October when bond yields rose fastest but investors added £631m over the whole month, the best result for bonds funds since June 2023.

Money market funds, the classic safe-haven asset class, also saw higher inflows, rising to £402m in October.

Glyn finished: “The suggestion that interest rates may stay higher for longer in the wake of the Budget made interest-earning assets like bonds and cash funds more attractive to investors.”

Donald Trump, the 45th president of the United States, is the Republican candidate in the 2024 presidential election. This despite multiple run-ins with the law; indeed, he is the first former president to have been convicted of a crime. Known for his real estate empire, Trump made a name for himself as a businessman, reality TV star and public figure before entering politics.

His 2016 presidential campaign emphasised a populist, ‘outsider’ message and his term in office was marked by major controversies, including two impeachments: one over Ukraine-related issues and the other following the 6 January attack on the Capitol. After losing to Joe Biden in 2020, Trump claimed widespread voter fraud and continued to rally his base, calling the legal proceedings against him political persecution. His 2024 primary campaign enjoyed strong support despite these controversies, positioning him as a polarising figure with dedicated supporters.

Trump's businesses and brand have often been at the centre of public attention, contributing to his image as a self-made billionaire, despite frequent legal and financial problems throughout his career.

On what platform was Trump elected?

Here is a summary of Trump's positions on the main issues of his 2024 campaign:

Education: Trump is proposing radical reforms for schools, with measures such as the election of head teachers, or ‘principals’, by parents; the withdrawal of funding for schools teaching ‘critical race theory’; and an end to tenure for teachers. He also wants to encourage prayer in schools and allow teachers to carry concealed weapons. This approach aims to give power back to parents and promote ‘patriotic’ values within the education system.

Universities: Trump plans to revoke universities' current accreditations and replace them with bodies imposing values in line with those of his party. He is also proposing substantial fines for universities that he considers discriminate against students, with the idea of funding a free online academy covering a wide range of knowledge.

Climate change: Trump wants to take the US out of the Paris Agreement again and undo Biden's climate policies, including reducing emissions and the target of 67% electric vehicles by 2032. He plans to massively increase oil and gas production.

Department of Justice: Trump is promising to appoint 100 like-minded prosecutors and to investigate some progressive local prosecutors. He also wants to create a unit within the DOJ to defend the right to self defence and combat alleged anti-conservative bias in law schools and law firms.

Crime: Trump wants to increase police numbers and supports practices such as ‘stop-and-frisk’, the dismantling of gangs and drug rings, and the use the National Guard if local police fail to respond. Trump also advocates the death penalty for drug and human traffickers.

Immigration: Trump wants to ban illegal immigrants from receiving aid, abolish birthright citizenship for their children, reinstate a travel ban for certain countries and suspend visa programmes, including the lottery and family visas. He also plans to close the southern border to asylum seekers.

Economy: Trump is proposing to cut taxes and lift federal regulations. He also wants to introduce basic tariffs on foreign products to encourage American manufacturing, with increases in these tariffs for countries practising ‘unfair trade’ (see below).

Healthcare: Trump plans to require federal agencies to buy only drugs and medical devices made in the United States. He also wants the government to pay no more than the best price offered to other nations for drugs.

Foreign policy and defence: Trump is proposing to ask the European allies to reimburse the United States for the depletion of their arms stocks as a result of shipments to Ukraine. He also takes a tough stance against China, calling for new restrictions on Chinese-owned infrastructure in the United States and wants to build a missile defence shield.

Social Security: Unlike former Republicans, Trump says there will be no cuts to Social Security or Medicare.

Homeless: Trump is proposing to ban public camping by the homeless, offering them a choice between treatment or arrest, and to create ‘tent cities’ where they would be rehoused, with access to healthcare and social support.

Big Tech: In response to allegations of bias against conservatives, Trump is considering issuing an executive order banning any collaboration between federal agencies and other entities to ‘censor’ Americans, as well as prohibiting the use of federal funds to fight disinformation.

How much will the deficit increase over the next 10 years?

Trump's tax plan could add $7.5trn to the national debt by 2035, taking it to 142% of GDP, according to key estimates. In particular, he proposes to make the Tax Cuts and Jobs Act (TCJA) permanent, further reduce corporate tax and increase military spending.

These tax cuts and spending growth would considerably increase deficits. In the best-case scenario, Trump's plan would increase the debt by $1.45trn, but in the worst-case scenario, the debt could rise to $15.15trn.

Despite some proposed measures to compensate, such as new customs duties and cuts in certain government programmes, his plan does not sufficiently tackle the increase in the national debt, making the budgetary outlook precarious.

What attitude to adopt towards China?

When it comes to China, Trump adopts an intransigent stance, advocating economic decoupling, the imposition of high tariffs and the revocation of China's permanent trade status. He also proposes to limit Chinese acquisitions of US industries, maintain military deterrence by modernising nuclear weapons and strengthen ties with Taiwan.

Trump holds China responsible for problems such as fentanyl trafficking and the genocide of the Uyghurs, advocating punitive measures and strict negotiations with Chinese leaders.

What impact would Trump's triumph have on Europe?

With Trump in the White House, European products could face significant challenges, as the former president has made it clear that he would impose vast tariffs, potentially ranging from 10% on all imports to much higher levels on countries such as China, which could also affect European products. The European Union (EU) is preparing for a scenario in which Trump carries out his threats by creating a list of American products that it could target with retaliatory tariffs.

Although these new levies are not the EU's baseline scenario, they are seen as a necessary response to Trump's potential trade measures against the Union. Trump has a habit of surprising the EU with unexpected tariffs, as he did in 2018 by imposing duties on European steel and aluminium. The EU retaliated by targeting politically sensitive US companies such as Harley Davidson motorbikes and Levi Strauss jeans.  Trump's return to power could be a copy and paste of 8 years ago.

In addition, Trump could also zero in on European taxes on digital services, which often affect American technology giants, further straining transatlantic trade relations.

The EU, already weakened by competition from cheaper Chinese electric vehicles and the end of its dependence on Russian gas, is facing a precarious situation. A trade war with the United States could further accelerate the continent's economic difficulties, particularly in its manufacturing sector, which has already been hit hard.

While the EU preferred to resolve trade disputes with the US through diplomatic channels, it is fully aware that the Biden administration has also maintained an ‘America First’ approach. His administration has introduced substantial subsidies for green technologies that encourage companies to shift their investments from Europe to the US, exacerbating the challenges facing Europe. The EU is therefore preparing for tough trade negotiations with the United States over the coming months ...

How much will higher tariffs cost?

Candidate Trump has proposed significant tariff increases as part of his presidential campaign; Taxfoundation estimates that if imposed, these tariff increases would raise taxes by an additional $524bn per year and reduce GDP by at least 0.8%, the capital stock by 0.7% and employment by 684,000 full-time equivalent jobs.

Taxfoundation's estimates do not take into account the effects of retaliation or the additional damage that would result from the outbreak of a global trade war.

Will tax cuts have an impact on the S&P 500?

During the election campaign, Trump's political approach, particularly with regard to corporate tax, could have a significant impact on the financial markets. If elected, Trump proposes to cut the corporate tax rate from 21% to 15% to stimulate business investment, increase profits and potentially boost job creation. This proposal is part of his wider economic philosophy of deregulation and tax cuts to fuel growth.

If Trump's proposals were implemented, it would likely lead to an increase in corporate after-tax profits, which could boost share prices, particularly in sectors such as energy, manufacturing and financial services. However, the markets have not yet fully priced in the possibility of a tax cut, probably because they are unsure of Trump's ability to obtain the Congressional approval needed to pass such legislation. Without a strong majority in Congress, Trump could find it difficult to implement his entire programme, particularly in key areas such as tax cuts.

In short, while Trump's proposed tax cuts could benefit markets by improving corporate profitability, political realities and legislative hurdles could limit the scope of these changes. Investors are keeping a close eye on whether his policies will gain ground in Congress.

All other things being equal, Bank of America estimates that Trump's proposal to lower the corporate tax rate from 21% to 15% would increase S&P 500 EPS by 4%.

How would the markets react to a divided Congress?

While investors do not yet have a clear view of how the markets will react after the elections, they can nevertheless take note of the historical performance of equities when Congress is divided between the parties. In fact, perhaps counter-intuitively, equities perform well when Congress is divided, with the S&P 500 averaging annual gains of over 17% in such scenarios.

According to analysts at LPL Financial, stocks have risen each of the last 11 times Congress has been divided, and 2024 could be the 12th. The reason is that Congressional gridlock reduces the likelihood of disruptive political changes, to the benefit of equities, generally.

In the current context, a divided Congress could also minimise the risk of major tax increases under a Harris administration. A divided government generally reassures the markets by providing a more predictable political environment. Analysts also note that while checks on power can be beneficial, cooperation is essential to meet the current economic challenges posed by the pandemic.

Since 1929, the most common configuration in Washington has been Democratic control of the White House and both houses of Congress, resulting in an average annual rise of 9.4% in the S&P 500 over 34 years. The second most common configuration saw Republicans in the White House and Democrats running both houses, with a lower annual return of 4.9% over 22 years. The best performance under divided government occurred with a Democratic President, Democratic Senate and Republican House, with an average rise of 13.6%, although this only lasted from 2011 to 2014 under Barack Obama.

How would the markets react to an entirely Republican Congress?

 Historical performance shows that under an all-Republican Congress, the S&P 500 recorded an average year-on-year rise of 13.4%. This is often attributed to a more stable political environment, favouring pro-business policies. However, a divided Congress tends to outperform, with an average return of 17.2% over one year. This scenario is well received by the markets as it reduces the risk of disruptive political changes, thereby minimising the potential impact of tax hikes or strict regulations, particularly under a Harris administration.

Such legislative gridlock favours a more predictable political framework, which tends to reassure investors. Indeed, a divided Congress has historically led to annual gains for the S&P 500 in the last 11 similar scenarios, with increases observed on each occasion, creating a favourable environment for the financial markets and reducing the likelihood of economic disruption.

Which sectors could theoretically benefit from Trump's arrival?

The prospect of a second Trump term could significantly influence investor sentiment. It is estimated that a Trump win could have a slightly positive impact on economic growth in the short term, but this effect could be quickly cancelled out by imported inflation and tensions over monetary policy.

In terms of sectors, here's what we can say:

Fossil fuels: Trump is also likely to rescind the Environmental Protection Agency's (EPA) mandates for electric vehicle sales, which currently require 56% of new vehicles sold to be electric by 2032. He could also remove the tax incentives for electric vehicles under the Inflation Reduction Act.

Pharmaceuticals: Reducing the cost of drugs and boosting domestic production of essential medicines is another initiative that Trump could undertake, which could be advantageous for US pharmaceutical companies, particularly biotechs.

An end to conflict (really?!): Trump's desire for an ‘immediate end’ to the conflicts in the Middle East and Ukraine could benefit US construction companies but could have a negative impact on arms-related businesses.

Education: Trump plans to transfer control of education from the federal Department of Education to state governments, which he believes are better placed to tailor education policies to their communities. Education technology players could well benefit from this.

Small- & mid-caps: Small and mid-cap stocks should benefit from a Trump presidency because of his pro-business policies, which stimulate economic growth and create opportunities for these companies. In addition, small-caps benefit from the prospect of lower interest rates, which reduce borrowing costs for the many unprofitable companies in the sector that rely on debt finance.

Prisons: After Trump took office in 2017, then-attorney general Jeff Sessions signed an executive order rescinding an Obama-era directive to phase out the use of private prisons. This sent shares in the two largest private prison companies - CoreCivic and GEO Group - soaring, both reaching post-election peaks in April 2017. That sort of momentum could return.

Finally, European and Chinese equities could be initially negatively impacted. The European automotive industry would be particularly vulnerable to a potential trade war with the United States, because of tariffs. In addition, the luxury goods sector and European high-tech companies could also suffer from US trade retaliation. The short-term reaction of sectors in the event of a divided government under Trump is likely to be more or less the same. Consumer discretionary could come under negative pressure, as could renewables and ESG leaders.

A stock to follow

There will be plenty of companies to watch when the US markets open on Wednesday, but there may be one to keep a very (very) close eye on: Trump Media & Technology Group.

Trump Media & Technology Group Corp (TMTG) is an American media and technology company headquartered in Sarasota, Florida. It manages the Truth Social social media platform and Trump is its biggest shareholder. Founded by Andy Litinsky and Wes Moss in 2021, it went public on 26 March 2024, after merging with Digital World Acquisition Corp (DWAC), a special purpose acquisition company (SPAC). Trump owns nearly 57% of the company...

And what about the long term?

It is often difficult to separate investments from politics, but it is important not to attach too much importance to election results when making financial decisions. Indeed, election results have little impact on long-term investment returns. Despite the alarmist rhetoric surrounding presidential campaigns, financial markets tend to perform well, regardless of which party is in power.

To illustrate this, since 1950, the S&P 500 has generated a cumulative return of 359,416% (with dividends reinvested), covering 14 presidents, including seven Republicans and seven Democrats. In other words, a $1,000 investment in the S&P 500 in January 1950, with dividends reinvested, would be worth around $3,594,160 today. This figure shows that investors should not base their strategies on election results, but rather take a long-term view.

How will the dollar and cryptocurrencies evolve?

Once again, this is a difficult question, as there are many factors that explain the greenback's performance (the economy, debt and interest rates). While we can imagine that with a Trump victory the dollar will rise in the short term, in the medium term things don't seem quite so obvious. A further analysis of the past reveals the following trends:

Over the last six administrations, the dollar performed best under president Bill Clinton, gaining 19.61% of its value.

The dollar had its worst performance under president George W. Bush, losing 22.00% of its value.

Over the course of the Republican presidencies during this period, the dollar lost 36.17% of its value.

A Trump win should have a significant impact on the cryptocurrency market (in the short term) by fostering a more favourable environment for these currencies, as Trump has expressed a new enthusiasm for digital currencies. His administration could roll back some of the regulatory crackdowns of the Biden era and create initiatives such as a "strategic national Bitcoin stockpile", positioning the US as a global leader in the crypto space.

This relaxed regulatory approach could attract more investment and innovation to the crypto-currency sector, but it also raises concerns about increased fraud risks and insufficient consumer protection, as evidenced by the Securities and Exchange Commission's (SEC) scrutiny of the sector.

How will raw materials behave?

A Trump return to power could have a significant impact on commodity prices, not least because of his pro-coal, pro-mining and protectionist policies. If Trump repeals Biden's Inflation Reduction Act, it could benefit traditional energy commodities such as coal and oil, while potentially boosting demand for platinum group metals (PGMs) used in internal combustion engines. However, China's economic policies and growth trajectory remain a key driver of global commodity prices, meaning that while Donald Trump's policies could influence some sectors, the greater strength of China's economic dominance will continue to play a major role in shaping global commodity demand and price movements.

In addition, the intensification of trade tensions with China under Donald Trump could push prices even higher by disrupting global supply chains. Finally, it is conceivable that the uncertainties associated with the arrival of the ‘controversial man’ could benefit gold.

The crucial summary

Below is a summary of the potential trends for different assets/regions if Trump takes the White House:

Source: John Plassard, Mirabaud

A Trump victory could lead to significant changes for the financial markets, with tax cuts for businesses, increased support for fossil fuels and a protectionist approach to trade. This policy could benefit certain sectors, notably energy, pharmaceuticals and small-caps, while posing risks for trade, particularly with Europe and China. Cryptocurrencies could benefit from Trump’s favourable stance, with potentially relaxed regulations. However, his programme of tax cuts and increased military spending could add to the national debt. Finally, a president Trump could also boost commodities such as coal and oil, while increasing demand for gold due to uncertainty.

John Plassard is senior investment specialist at Mirabaud Group. The views expressed above should not be taken as investment advice.

Shoot-the-lights-out equity funds are all well and good in a bull market but they can drop dramatically and suddenly when the tide turns. Therefore many fund selectors seek to balance high-octane investments with more conservative and diversified multi-asset funds.

Although defensive funds won’t necessarily maximise returns, they should protect capital during downturns. To that end, Trustnet asked fund selectors which multi-asset strategies they use to complement equities and bring down portfolio volatility.

Troy's Trojan fund and its ethical sibling

Laith Khalaf, head of investment analysis at AJ Bell, said Troy Asset Management’s Trojan fund is a good option for cautious investors who want some growth to combat inflation while mitigating market volatility.

FE fundinfo Alpha Manager Sebastian Lyon and Charlotte Yonge build the fund around four pillars of quality: equities, index-linked bonds, gold and cash, with – like all of Troy’s funds – an emphasis on capital preservation above all else.

“Within the equity portion of the portfolio, the managers take a conservative approach, opting for large, liquid companies with robust balance sheets and quality characteristics,” Khalaf said.

IBOSS Asset Management added stablemate Trojan Ethical to its global equity portfolio a year ago to add some downside protection and lower the portfolio’s beta, which had been rising. Trojan Ethical has a beta of 0.28 to the IA Global sector due to its diversified portfolio, including a 29% allocation to money markets.

Chris Metcalfe, chief investment officer of IBOSS, said Trojan Ethical tends to perform well in relative terms during weeks when global equity markets stumble and complements higher octane strategies such as Rathbone Global Opportunities.

Metcalfe also wanted to gain more exposure to gold, which he correctly anticipated would perform well once monetary policy easing got underway (because gold doesn’t have an income so is sometimes seen as less appealing than other asset classes when interest rates are rising).

Trojan Ethical has 13% in gold – IBOSS’ second-largest exposure to the yellow metal, after the Ninety One Global Gold fund.

Gold is being propped up by buyers who are not price sensitive, such as central banks trying to diversify their exposure away from the US. As geopolitical tensions increase, it is the ultimate safe haven, he said.

Performance of funds vs sector over 3yrs

Source: FE Analytics

Latitude Horizon

Latitude Horizon has a structural equity weighting of 50% with the remainder invested in a variety of fixed income securities, commodities and currency exposures.

Joe Holland, assistant investment manager at Tyndall Investment Management, said: “The equity portion of the portfolio focuses on defensive global equities with low unit sizes; currently no equity holding exceeds 3%. These companies tend to be firms that are able to maintain or grow earnings despite wider financial conditions.”

For instance, the fund recently invested in United Health, a market leader in a defensive growth industry, which grew its earnings at 18% per annum from 2000 to 2023.

The other half of the portfolio is flexible and its exposures vary, depending on where manager Freddie Lait finds the best risk-adjusted returns. He also attempts to hedge some of the risks within the equity part of the portfolio. The fund currently holds 11% in long-dated bonds, 12% in short-dated gilts and 28% in short-dated bonds.

Performance of fund vs sector over 3yrs

Source: FE Analytics

“We like it because the equity element provides a defensive exposure to equity movements, whilst the non-equity element of the portfolio should help insulate it from the worst of any falls,” Holland concluded.

Winton Trend

Winton Trend employs a rules-based investment strategy, designed to profit from medium-term price trends, both up and down, in equity indices, government bonds, interest rates, currencies and commodities.

Performance of fund vs sector over 3yrs

Source: FE Analytics

Rob Burgeman, investment manager at RBC Brewin Dolphin, said: “The fund aims to generate capital appreciation over the long term, regardless of whether markets are rising or falling, making it complementary for traditional stock market and bond investments.

“It is reasonably uncorrelated with traditional equity markets and can suffer drawdowns when markets switch suddenly. However, these tend to be relatively modest, making this a good diversifier for portfolios and a reasonable source of liquidity when required.”