Fund management has become more of a team effort, as investors have increasingly prioritised a fund’s structure and wider team over individual manager's leadership.  

As a result, the industry's obsession with ‘star managers’ has largely fallen by the wayside, with young managers increasingly struggling to make a name for themselves.

Nevertheless, Paul Angell, head of investment research at AJ Bell, said that “the industry remains a people business” and noted that trust between fund buyers and managers remains crucial.

While genuine ‘rising star’ fund managers are rare; several young fund managers have already established themselves as exceptional within the wider sector.

Below, Angell identified three ‘rising stars’ of modern fund management: Jonathan Golan, Liam Nunn and Charlotte Yonge.

Golan is an FE fundinfo Alpha Manager, described by Angell as “perhaps the stand-out rising star in the industry”, serving as the sole manager of the £1.1bn Man GLG Sterling Corporate Bond fund, which was initially created in September 2021.

For a newcomer to the industry, the fund has an impressive record under Golan’s tenure. It has been the top-performing fund in the wider IA Sterling Corporate Bond sector over the past year.

Performance of the Fund vs the Sector and Benchmark over 1yr

Source – FE Analytics.

Golan practices a bottom-up approach to investing, focusing on smaller bonds that the team believes are undervalued, often using the sector’s maximum 20% allowance for high-yield bonds.

Having worked previously at Aviva and Schroders, Golan has a proven track record of success. He also manages several other successful funds at the firm, including the Man GLG Global Investment Grade Opportunities and Man GLG Dynamic Income funds.

Another young fund manager making a name for themselves is Liam Nunn, Co-manager of the £884m Schroder Global Recovery fund.

Under the leadership of Nunn and co-manager Nick Kirrage, the fund has performed commendably, with its assets under management (AUM) tripling since Nunn took over in 2019.  

Over the past three years, the fund has ranked within the top quartile of its sector, outperforming the MSCI world index and the wider IA Global peer group. However, it has had comparatively weaker returns over the past year.

Performance of the Fund vs the Sector and Benchmark over 3yrs

Source – FE Analytics.

Angell said: “Nunn is a passionate value investor, thoroughly committed to the Schroder value team’s disciplined accounting-based process where they scour the cheapest 20% of global stocks, looking to avoid value traps.”

With five years of experience at the firm, Nunn now serves as part of the managerial team for several other funds, most notably the £1.1bn Schroder Global Sustainable Value Equity fund.

Finally, Angell highlighted Charlotte Yonge, manager of the Trojan Ethical fund, which has accrued £827m AUM since its launch in 2019.

Over the past three years, the fund has consistently beaten the IA Flexible Investment sector, generally ranking within the second quartile under Yonge’s leadership.

She pursues a more defensively managed, long-term growth strategy, aiming to preserve capital through investing in traditional asset classes such as equities, bonds and gold.

Performance of the fund vs the Sector and Benchmark over 3yrs

Source – FE Analytics.

Despite weaker performance in the past year, Yonge’s track record is still impressive with the fund delivering “steady capital growth and lower volatility than wider markets”.

Yonge also sits on the management team of several other funds at Troy, most notably, she currently serves as the deputy manager of the £5bn Trojan fund.

Ultimately, while the industry has shifted away from the obsession with ‘star managers’, it is not impossible for managers with the right combination of characteristics to thrive.

“A rising star manager blends that rare mix of youth, intelligence, confidence, opportunity and good fortune,” Andell concluded.

It is possible that investors will remember the summer of 2024 as the turning point, the beginning of the end, the moment things started to unravel. But take away the emotional jolt that always accompanies a reversal in sentiment and the evidence suggests otherwise.

It is highly plausible that stocks go back to climbing the proverbial ‘wall of worry’ and that August 2024 is quickly forgotten.

What next?

I expect a broader range of sectors will start contributing to the rise of equity markets. Up until now, a narrow sub-set of the 1,429 MSCI World Index constituents have done the heavy lifting in driving the bull market.

Most of them are large companies that have been better positioned than smaller businesses to weather higher interest rates. A few mega-cap tech stocks have led the way, their earnings and earnings expectations boosted by the boom in demand for artificial intelligence (AI).

But while companies associated with this theme may still have room to run, investor interest has come with growing scrutiny over elevated valuations and the pace at which these businesses are managing to monetise AI.

Interest rate expectations are also beginning to shift. Fresh momentum for the broader market will therefore need to come from companies that have been out of the limelight, where earnings expectations – and multiples – are much lower.

Catch-up trades

Don’t be surprised if that’s what happens. Encouragingly, small- and mid-cap stocks that were left behind have started to catch up with market leaders in the US and the UK as they are set to benefit from falling interest rates.

There are also mid-cap stocks caught up in the sell-off – in software, for example – that have strong business models and now trade attractively. It’s a good set-up for early cyclical sectors as well as for prioritising value over growth.

In Japan, the August correction has helped close the gap between smaller companies and the rest of the market. Japanese equities have a lot to offer at only a 15x price-to-earnings (P/E) ratio (the S&P 500 was trading at 24x at the time of writing).

Near-term volatility shouldn’t stifle the country’s multi-year corporate governance reforms, which are prompting companies to eliminate idle assets and cross shareholdings.

In fact, through our own company engagements, we know the movement to drive shareholder returns has broadened out to mid-caps.

The catch-up trade applies to countries, too. There’s value to be found in the UK, for example, where the market is trading at around 12x P/E, topped up with a 4% dividend yield.

The UK may have made headlines recently for the wrong reasons but that doesn’t change the fact that policy is supportive. The Bank of England has begun to cut interest rates and the market is relaxed about the new government, helped by its emphasis on economic growth, political stability, and housebuilding.

In other words, attractive entry points are now available to investors in many regions and in styles that enjoy a range of favourable conditions, where multiple compression is much less of a concern compared to the more crowded corners of the market.

After the dust settles

Times like these are made for investors who focus on fundamentals. When sentiment is fickle, things can turn quickly, even when fundamentals are sound. A few economic data points and policy statements can spark immense volatility and contagion, just as we saw recently in the US and Japan.

Yet for all the talk of a US recession, consumers’ and companies’ balance sheets remain resilient. A soft landing is still the most probable outcome. And the sell-off did nothing to change the trajectory in Japan, where reflation is emboldening companies to expand margins, increase capital expenditure, and return more cash to shareholders. Equities have already regained some ground, with smart money snapping up bargains.

And from the perspective of a global equity investor, stocks remained in positive territory for the year throughout the recent sell-off.

Stocks go up, though not in a straight line

Source: Fidelity International, Refinitiv Eikon Datastream, MSCI All Country World Index, August 2024.

Staying invested is usually much smarter than being scared out of positions by volatility. The benefits of equity investing come from its long-term compounding effect, which is undone by short-sighted reactions.

Anyone who stayed invested since 1993 in the S&P 500 would have generated returns of over 2,100% up to the week ended 2 August 2024. But had they missed the five best days of that period, that would fall to just 1,328%. It dwindles to 280% if we take out the best 30 days.

The price of fear

Source: Fidelity International, Refinitiv Eikon Datastream, August 2024.

And you can tell a similar story for every equity market around the world. If there’s one thing I’ve learnt from decades in asset management, it’s that stock markets don’t go up in a straight line. Staying invested in a diversified portfolio is almost always the smartest strategy.

Niamh Brodie-Machura is co-chief investment officer of equities at Fidelity International. The views expressed above should not be taken as investment advice.

Passive funds have scooped up investors’ money and “put a dent in active managers’ fortunes”, according ISS MI EMEA research leader Benjamin Reed-Hurwitz, editor of the latest Pridham report.

Investors poured money into funds in the second quarter of 2024 with big fund groups benefiting, although investors’ preference went to passive solutions over active funds.

The Pridham report monitors sales trends in the UK fund market using data supplied by the fund groups themselves. It covers more than £1trn in assets under management, with Vanguard included for the first time in the latest report.

From April to June this year, some 60% of the UK’s largest asset managers increase their net sales, while 43% registered positive retail net flows during the quarter, compared to 38% in the previous quarter and 21% in the final three months of 2023.

The positive sentiment, paired with a slowdown in outflows, has fuelled a sense of “guarded optimism” among the fund groups, but whether that trend continues into the third quarter “remains to be seen”, according to Reed-Hurwitz, especially considering the severe market volatility we have witnessed in recent weeks.

“On the positive side, investors in the past have been drawn to equities when interest rates are falling, as they have begun to in Europe and, perhaps, soon in the US, too,” he said. “That may well provide the conditions needed to carry that momentum through to the end of the year.”

However, it was passive equity funds that led the way with more than £5bn in net sales, with the five best-selling fund groups in the second quarter all big names in tracker funds – BlackRock, Vanguard, Legal and General, Fidelity and HSBC Asset Management topped the charts, as the tables below show.

Source: The Pridham Report

Vanguard led the way in mixed-asset fund sales, with its LifeStrategy range (in particular the 80% equity option) propelling the firm’s success among retail investors.

But while the success of passive funds “has put a recent dent in many active managers’ fortunes”, Reed-Hurwitz is convinced that there is a sense that “investment opportunities will continue to broaden in the coming quarters”, particularly in the equity space.

In fact, the report showed that many active managers managed to carve out pockets of success in certain areas.

JP Morgan was the prime example of this, rising up the ranking thanks to the launch of a UK-domiciled version of its Global Focus fund, which became the best-selling fund by net sales for the quarter and reached £1bn of assets under management.

Global and North American funds remained crowd favourites, but there were successes elsewhere too. Managers such as Artemis managed to attract interest in less loved equity sectors, with Artemis UK Select a top performer in the UK. It helped the asset manager achieve ninth place in the retail gross sales ranking.

When it comes to bonds, sterling corporate bond funds took centre stage as investors’ top choice in eight out of the top 10 bond fund houses by gross sales. BlackRock, LGIM and Royal London were all beneficiaries of their popularity.

DIY investment platform TILLIT has decided to withdraw the £1.2bn AXA Framlington Global Technology fund from its fund platform, the TILLIT universe.

This decision follows the departure of primary fund manager Jeremy Gleeson earlier this year, which caused the fund to be placed under review by TILLIT’s fund selection team in June.

TILLIT explained that, following the departure of Gleeson, there were expectations of further potential disruption that caused concerns about the fund’s position. These included the possibility of further team departures, as well as the ongoing discussions about BNP Paribas’ attempt to acquire AXA.

Additionally, the fund has seen a decline in performance over the past year, falling to the fourth quartile of the IA Technology and Technology Innovation sector, and failing to outperform the benchmark.

Performance of fund vs the sector and benchmark over 1yr

Source – FE Analytics

Sheridan Adams, head of fund selection at TILLIT, said: “Given the uncertainties tied to this corporate transition and leadership turnover, especially during a period when stability is crucial for investors, we consider the risks too substantial to ignore.

“As a result, the investment committee has decided to remove the AXA Framlington Global Technology Fund from the TILLIT universe.”

DIY investors are set to put their “money where their mouth is” this year, with almost 95% of investors planning to take on more investment risk in the next three months, according to a survey by Charles Stanley Direct.

Asked to rank their risk appetite for the next three months, 34% of respondents planned to take a ‘very high’ or ‘high’ risk approach to investing, with 10% set to take on a significantly higher risk profile than average.

By contrast, just 19% of respondents were planning to pursue a low-risk strategy over the next three months and a mere 4% of the approximately 1,000 DIY investors surveyed planned to take no additional risk at all.

Crucially, this greater risk appetite is being driven by young investors, with 61% of ‘gen-Z’ planning a ‘high risk’ approach, compared with just 39% of ‘millennials’ and 9% of ‘baby boomers’.

Investors with a financial adviser also reported plans to increase their risk appetite. According to the firm, 67% of DIY investors taking financial advice had plans to expand their risk appetite in the next three months, compared to just 33% of those without.

Rob Morgan, chief investment analyst at Charles Stanley Direct, said: “Younger investors, and investors that take financial advice, are driving forces of optimism, and rightly so.”

These more bullish investment strategies, Morgan said, are the result of a much greater enthusiasm for the wider stock market among investors.

Indeed, the survey found that more than 70% of DIY investors expected the FTSE 100 to rise in the next six months. Younger investors were again particularly enthusiastic, with more than 80% of gen-Z expecting the FTSE 100 to rise.

Morgan added: “Despite a rocky global market dip at the beginning of the month, the FTSE is up 6% year to date and rebounding well.”

“Investors who have been actively increasing their exposure to UK equities over the past three months -– at a higher rate than their global investments – will be well positioned to realise their financial ambitions faster and more effectively than their passive peers.”

This more bullish attitude has resulted in 40% of DIY investors increasing their exposure to the FTSE 100, and 35% adding to FTSE 350 names.

Morgan said: “Now, the future looks bright, with expectations for higher growth, lower interest rates, and something that looks suspiciously like stability.”

Housebuilders could be on the rise in the coming months and years if interest rates continue to fall and the government pushes on with its manifesto pledge to build 1.5 million new homes over the next five years.

Last month inflation figures came in slightly higher than the previous – up to 2.2% in July from 2% in June. It marked the first time it had risen in 2024, but few believe this will deter the Bank of England from lowering interest rates.

Interest rates are key for housebuilders, as high mortgage rates (a knock-on effect of a higher Bank rate) mean fewer people move house.

At the same time, for the Labour party to achieve its ambitious housebuilding goal there would need to be a 41% uplift on the 212,570 homes completed during the 2022-23 financial year.

John Moore, senior investment manager at RBC Brewin Dolphin, “Housebuilders had a torrid 2023 in challenging macroeconomic conditions, but unlike in 2008 they were well capitalised and the sector weathered the storm relatively unscathed – at least at the larger end of the market.

“Now, with a government committed to building new homes and interest rates being cut to 5%, the picture looks a lot more positive.”

Danni Hewson, head of financial analysis at AJ Bell, agreed. “Housebuilders have had a difficult couple of years as costs spiralled and rate hikes impacted demand. But there have been a lot of changes, from a new Labour government seeking to reinvigorate the sector and open up greater opportunities to acquire potential plots, to a pivot in Bank of England monetary policy and a first interest rate cut in over four years,” she said.

Housebuilders

In the UK there are several options to choose from when it comes to housebuilders but there are two that caught the eye of RBC Brewin Dolphin’s Moore.

The first is Berkeley Group, which typically focuses on mixed-use developments, which helps to manage the risk of any downturn in demand for housing, he said.

“Preferring growth of its book value overpaying dividends out, it has never been a great yielder but has tended to be less volatile than many of its peers.”

Performance of shares vs market over 3yrs

Source: FE Analytics

The other is Persimmon, which has been viewed as “the blue-chip choice” in the sector for quite some time but performance over the past few years has been particularly poor, as the above chart shows.

Although it had to cut its dividend hard last year to compensate for slowing sales, its 4.3% yield last year remains high. The firm is also considering a £1bn bid for rival Cala, which could “add another string to its bow with more exposure to the premium market and more geographic spread within the UK.”

There have been many merger and acquisition discussions in the sector. AJ Bell investment director Russ Mould highlighted Barratt’s acquisition of Redrow as a positive. It should “allow Barratt to replenish its landbank – a necessary precondition to ramping up volumes – with prices in the open market not having retrenched as much as might be expected in the current cycle,” he said.

Not all have been successful, however, reminding investors that investing based on takeover deals is a risky business. For example, rival housebuilder Bellway ended its pursuit of Crest Nicholson last week in a sudden change of heart. Hewson said: “The end of every romance leaves more than a few questions hanging in the air. The decision by Bellway to end its pursuit of Crest Nicholson came without clarification and sent shares in the latter plunging by almost 20%.”

Suppliers

Although only a couple of housebuilders stood out for Moore, in the supply trade there are four names of interest. Kitchen maker Howden Joinery is one. It has an “excellent track record and network reach throughout the country”, he said, noting that it should also benefit from a rise in the refurbishment market if mortgage rates remain high and people decide to stay put and improve their current properties.

Up next is Marshalls, the FTSE 250-listed construction supplies company, which provides materials for the housebuilding and landscaping markets.

“The business occupies a strong position in the UK and is generally well managed, but its shares have suffered in recent years as construction activity struggled. Its shares have rallied since the election of the new government, with plenty of room for further growth,” said Moore.

Performance of shares vs market over 3yrs

Source: FE Analytics

Breedon Group is a specialist in aggregates, asphalt and cement and has climbed into the FTSE 250 alongside Marshalls in recent years. “It forms a crucial part of the UK’s supply chain for raw materials,” he said.

Lastly, brickmaker Ibstock has “flown under the radar” during the difficult time for the industry but shares have risen recently on the back of the new government’s plans, which could produce “further opportunities for the company”, concluded Moore.

Global equity and sustainability funds dominated the latest ‘Spot the Dog’ report by Bestinvest, which names and shames the ‘dog’ funds that lagged behind a relevant benchmark by over 5% for the past three years as well as in each individual year.

Since the last report, the doghouse got smaller, as 14 funds redeemed themselves, but the tally is still a staggering 137, remaining significantly higher than the 56 funds flagged only a year ago.

There were two main reasons for this, according to Jason Hollands, managing director of Bestinvest. First, one-fifth of all dog funds were sent to the kennel because of the surge in oil and gas prices since 2021.

“The high number of funds badged variously as sustainable or responsible is in part down to the stellar performance of oil and gas stocks in 2021-22, as the alternative and renewable energy market fell out of favour,” he said.

Performance of indices over 3yrs

Source: FE Analytics

The second culprit was the market’s concentration in artificial intelligence (AI) and technology names.

“When you consider the Magnificent Seven now represents a third of the US S&P 500 Index by market capitalisation and 22% of the MSCI World Index, it helps to explain why global fund managers not fully weighted to this extremely concentrated band of influential stocks struggled to consistently beat the markets.”

This meant that global equity funds dominated the latest list with 44 names – 43 in the IA Global sector and one, Premier Miton Global Sustainable Optimum Income, in the IA Global Income sector.

Source: Bestinvest

St. James’s Place Global Quality was the largest of the lot, and while quality companies have been out of favour, “that is not to excuse this perennially underperforming pooch, a frequent visitor to the doghouse,” said Hollands.

Despite its continuous poor performance, the fund charges a whopping 1.83%, making it the most expensive fund in the dog house.

But it was not the only behemoth in the list, with the report identifying 10 Great Danes – funds over £1bn –, accounting for £26.8bn of investors’ money in underperforming assets.

“Half of them were in the global sector, highlighting how some investors have their money with managers whose investment approach is deeply out of step with a market that has been narrowly led by a small cluster of giant companies benefitting from AI mania.”

The picture wasn’t much different for the 44 dog funds across the UK All Companies, UK Equity Income and UK Smaller Companies sectors, where about a quarter was comprised of ethical and sustainable funds.

Source: Bestinvest

Trojan Income stood out as the largest dog in the UK pack, with its “naturally defensive positioning leaving it struggling as markets have risen”, Hollands explained.

Equity income strategies recovered in 2024, but that wasn’t enough to save the Premier Miton UK Multi‑Cap Income and VT Downing Small & Mid‑Cap Income funds from the list. Both have a small-cap bias compared to their peers.

Hollands called time for “some doggy discipline” for abrdn UK Income Equity, abrdn UK Income Unconstrained Equity and HL Select UK Income Shares, all of which have kept their dog status since last year with reasons for underperformance that were “less clear”.

UK small-cap funds were extremely challenged until very recently, but some inclusions were not explicable to Hollands.

“Jupiter UK Smaller Companies and Royal London UK Smaller Companies are large funds from companies that should be doing better,” he said.

“Amati is a specialist smaller companies boutique with previously strong performance, so the WS Amati UK Listed Smaller Companies is a surprise inclusion.”

Surprising inclusions from the last edition didn’t materialise this time, as both Terry Smith’s Fundsmith Equity and Nick Train’s WS Lindsell Train UK Equity dropped off the list.

Hollands concluded: “Funds can stumble for a myriad of different reasons, from poor decision making or a run of bad luck to instability in the team, or because the fund has a style or process no longer favoured by recent market trends.

“Identifying whether a fund is struggling with short-term challenges that will later pass, or more deep-rooted issues with long-term consequences is vital for investors considering whether to remove an investment from their portfolio.”

Being a fund manager is hard, particularly for those in the global sector, where beating the MSCI ACWI has proven to be an almost insurmountable challenge.

In the FO Equity International sector, where Dmitry Solomakhin’s £1bn Fidelity FAST Global fund sits, just 13% of the peer group has managed to beat the benchmark index over the past decade.

Yet his fund has been one of the rare exceptions, up 270.5% over 10 years, around 60 percentage points ahead of the index. The figure is even more pronounced since the fund’s launch in 2013, as the below chart shows.

Performance of fund vs sector and indices since launch

Source: FE Analytics

This performance is even more impressive when considering his contrarian investment style, which is has been out of favour for most of the period. To show this, we included the MSCI ACWI Value index in the chart above, which has lagged the broader benchmark by some 73 percentage points.

Despite this, he admits that investors who believe the market is right should avoid his fund and stick with an exchange-traded fund (ETF).

Below, he also tells Trustnet why new fund managers are “doomed from a statistical perspective”, how high risk-adjusted returns with low volatility is “science fiction” and why he learned and would change absolutely nothing from his best and worst years.

What is your process?

This is a long/short fund. The long book is a book of blow-ups. What I look for is businesses where the market thinks the model is broken, whether that be operational issues, financial issues or corporate governance issues. They trade at very stressed levels.

Most of the time the market is right. In 19 out of 20 cases if the market says the company is broken, then it is broken. I am trying to find the cases where I think the franchise is good and if the turnaround works it becomes a normal business again.

The short book is currently skewed towards bubble names.

Why should investors pick your fund?

If you look at my peer group, the market has beaten around 87% of the group. So basically if you are a global fund manager just starting in the job you are doomed from a statistical point of view.

So my advice to investors would be not to go for my fund necessarily, but you should go for an outlier. It could be growth, quality or contrarian. Something that gives you a chance of not being in the 87% [of underperformers].

How risky is your fund versus peers?

The long book will be quite volatile and risky just by the nature of the positions that I take. If you think about it, I don’t own anything that goes up when the benchmark does. If it goes up at the same time as the benchmark it is not contrarian – it is a good quality company.

The short book is used solely for alpha generation. It is not used to reduce risk, hedge or pair trades. Every position is a stock-specific view. You can argue that leverage increases the risk over the short term.

The reason I do this is because if you do things the normal way you get normal results. You can be low volatility but you won’t beat the benchmark.

Everyone says you want to have high risk-adjusted returns with low volatility but that is science fiction. It sounds good to clients but does not exist in real life, unfortunately. You have to sacrifice something somewhere.

What have been your best and worst calls in the past year?

Rolls Royce has been in the portfolio for many years. It used to be a value trap. Now it is recovering partly because travel is recovering and partly because management has done an amazing job turning around the company. The contribution to the portfolio has probably been around 627 basis points.

The biggest loser is a short position that I can’t name for compliance reasons but it is one of the artificial intelligence winners. It cost me approximately 475 basis points.

The fund has been in the top quartile of the sector over 10 years. How have you done this?

From the style point of view I suffered when there was a momentum bias because momentum has been working in the market. If you look at those disruptors leading the market, not owning them has cost me a lot of money. Since inception, the fact I am anti-momentum has detracted in relative performance.

What worked on the other side is the idiosyncratic, stock-specific turnarounds that compensated for this headwind.

Were there any particularly good or tough times?

If you look back, 2020 was the worst year ever for the fund. I owned a lot of Covid losers and was short a lot of Covid winners – I just didn’t know it until Covid hit.

The other side of the spectrum was 2022, when momentum factors were a problem. Our headline numbers [returns] went up a lot.

People ask me ‘what went wrong in 2020 and what worked in 2022?’ My response is I learned absolutely nothing and would change absolutely nothing. I owned the same names. What didn’t work in 2020 was exactly the same as what worked in 2022.

Performance has waned over one year – why?

Part of it is shorting the AI winners. Another part is the benchmark has been very concentrated and the Magnificent Seven has been very strong, which is a very significant headwind.

If you believe in the bull market then you don’t need me, buy a Nasdaq ETF and you will save a lot of money. But if you think the market is volatile then you want to have this fund.

The only other thing is, if you buy my fund, don’t make it your main allocation. Because I don’t want people to lose sleep at night or get upset.

Performance of fund vs sector and benchmark over 1yr

Source: FE Analytics

Why do you have so much in the UK?

I started building the position ages ago, it was the day after the Brexit referendum because the currency and market sold off. All of the names are stock-specific special situations and most are global businesses such as Rolls Royce and defence contractor Babcock.

When do you sell?

I start thinking about selling when I am no longer differentiated from the market. If you look at my track record I am almost always too early. Sometimes I am years too early.

There are examples where I missed out on a few hundred percentage points of upside because the stock stopped being contrarian and became quality.

What outside of fund management?

I have three kids. I love the outdoors and, in particular, trail running and mountain running. I used to do a lot of ultra [marathon] races but I’m older now so I do it mostly for fun. It is good psychologically because it clears your head out.

If the past year has taught investors anything, it should be that forecasting the future is futile.

Take US interest rates as the crowning example of this. At the start of the year investors were full of optimism that the hiking cycle was at an end and central banks around the world would start to rapidly unwind the rate cuts of the previous 18 months or so.

So much so, that there were between six and seven cuts expected by the end of January 2025.

Six months later, few were predicting many rate cuts at all. At the midway point of the year forecasts suggested there would be one or (perhaps) two such cuts.

Richard Champion, co-chief investment officer at Canaccord Genuity Wealth Management, said this was because there were still “uncomfortable inflation numbers” as well as “the sense the US economy was still growing very fast despite the interest rate rises we’d seen”.

Then, early August happened. Markets sold off rapidly for various reasons that have been discussed already on Trustnet. Here is one such example if you need a reminder.

This induced panic, with some economists even calling for the Federal Reserve to cut rates in an emergency meeting in August ahead of more cuts in September.

Champion said this would have been “panic-inducing” and would have implied the Fed “had some insight” that things were really worrying. If it had done so, he admitted he would have “run for the hills”.

Again, this blew over. However now experts are forecasting the same amount of rate cuts as they were at the start of the year (around six), albeit slightly later than originally forecast, with these expected to take place until June 2025.

Champion said we have “done a complete round trip” since the start of the year and that we’d “gone down a hill and back up it”.

For his part, he still thinks there are too many baked-into expectations, suggesting four rate cuts in the coming 12 months, rather than the eight or so that are predicted at the top end of estimates.

But he is aware that a lot can go wrong over the next 12 months. As such, he suggested it is more important to look at the “direction of travel” rather than make strong predictions about individual meetings or the number of cuts.

This seems logical. The direction of travel has always been that rate cuts are coming. Whether it be one, three, five, eight, 57 or however many people predict.

For those that want to invest for lower interest rates, this week Matteo Anelli wrote up four fund picks from Fidelity International investment director Tom Stevenson that centred around real assets – such as infrastructure and property – which he believes will do well.

Just don’t expect them to sail higher as the Federal Reserve (and other central banks for that matter) are unlikely to always do what the experts predict.

Investors have been keeping a sharp eye on the results of the elections this year, with all eyes on the implications of the ongoing US presidential race.

But according to Andrew Bell, chief executive officer of the £1.6bn Witan Investment Trust, “politicians matter far less than they like to think” when it comes to markets.

Indeed, despite investors' tendency to redistribute assets following election predictions, such as last month’s surge in investors pouring money into the ‘Trump trades’, historically there is no clear relationship between election results and market performance.

For example, in the US, the S&P 500 has made positive returns under both Democratic and Republican presidents since 1957, with discrepancies being the result of other economic developments rather than political allegiances.

Below he highlights three main themes for the coming months: inflation and interest rates; artificial intelligence (AI) and volatility.

Ditch the election obsession

Wider economic developments will have a greater impact on the global equity market than elections. Perhaps most notably, the potential for further interest rate reductions in developed markets is the thing investors need to focus on.

In June, the Bank of England elected to cut interest rates to 5% and positive inflation data in the US suggests the Federal Reserve may soon choose to do the same at its upcoming September meeting.

Bell said: “The underlying picture appears to be that interest rates are peaking around the world. So, people are now thinking as interest rates start to come down, we appear to have put the peak in inflation behind us, next year things should be a little bit better”.

This should be a net positive for stocks and, as such, next year investors will be focused on which markets are recovering, rather than which are falling, he said.

If developed economies could grow by even 1.5% for the rest of the year, the equity market will be in a much stronger position, Bell concluded.

A bi-partisan market

Optimism over the future of the equity market is further supported by the fact that many sectors enjoy bi-partisan support and are likely to experience continued investment regardless of election results.

The most notable of these sectors is technology, with companies such as the Magnificent Seven remaining highly lucrative investment opportunities that account for nearly a third of the S&P 500, despite recent poor performances.

AI, robotics and new forms of technology have continued to rise this year and have become highly attractive to investors. Markets such as these will lead to further enthusiasm for equities in 2025.

Witan chairman Andrew Ross said there is now a much stronger backdrop for equity markets, directed by “positive news around corporate earnings, centred on the boom in the semiconductor sector, and linked to investment in generative artificial intelligence systems.”

Recent volatility

However, it must be recognised that it has not all been smooth sailing for the equity markets this year. Poor recent non-farm payroll data from some of the leading tech firms damaged US investor confidence, with the S&P 500 experiencing its greatest daily drop since September 2022, as investors pulled out of equities.

Market summary of the S&P 500

Source – Google Finance

The index has fallen over the past month, sparking fears of a potential recession in US markets that have limited investment enthusiasm.

Nevertheless, Bell’s outlook for global equity markets was broadly positive. While elections and recent statistics represent a short-term policy risk, in the long term, "economics matter more".

The past two years have ushered in a generational change for markets. Gone are near-zero interest rates, low inflation, stable growth and long economic cycles that were observed for well over a decade.

While we believe the rate-hiking cycle is likely ending, we are now entering an environment that will be characterised by slower economic growth alongside higher and more volatile inflation.

In this environment, we believe fixed income will provide a higher return alternative to other asset classes than in the previous decade.

By comparison, equities are expected to be lower, facing elevated valuations, slower growth and wider cost of capital. However, we believe real assets should outperform both bonds and equities as the starting point for valuations is attractive.

While forecasters have consistently been too optimistic about inflation falling, we expect stickier inflation going forward, due to commodity underinvestment, tight labour markets, geopolitics and deglobalisation.

Diversifying beyond stocks and bonds with real assets is likely to become increasingly important in creating more efficient portfolios.

Fixed income – a higher return alternative?

The new regime of higher rates and higher-trend inflation has mixed implications for fixed income returns. The upside is that the recent rise in interest rates means that capital losses are likely behind us, and higher current yields are expected to generate good returns (3.9% per year) over the next decade.

That’s a significant difference from the previous regime (spanning 2012–2021), when there were only three months in which 10-year US Treasuries closed with a yield greater than 3%.

Following the growth and inflation rebound post-Covid, and aggressive central bank tightening, short-term rates have shifted higher, brushing up against 5% in 2023.

While a higher-for-longer cyclical environment has dominated market attention lately, neutral real rates are slightly lower than current levels, indicating Fed easing.

Regardless of the timing and number of rate changes, we do not expect rates to decline to pre-Covid levels. Indeed, our base case anticipates a terminal Fed funds rate of around 3% over the next decade.

The starting point for corporate credit markets is also relatively attractive from a yield perspective as these markets appear poised to outperform Treasuries. However, the starting point on spreads poses shorter-term risks in a slower-growth environment, which could lead to spread widening and a cyclical uptick in defaults.

Preferred securities had a strong year, returning 8.2% in 2023 despite the well-publicised banking sector turmoil. Looking ahead, we remain optimistic about preferreds’ return potential, including strong fundamentals, attractive valuations and the end of the rate-hiking cycle.

Equity returns are lowering

Global equity markets face several crosscurrents in the years ahead. Strong nominal growth should support top-line growth, particularly in the US, even if some margin compression is possible from currently elevated levels.

However, the starting point for valuations is less supportive in a higher–yield interest rate regime and given 2023’s strong performance, more than half of which is attributable to multiple expansion.

Combined, this suggests US equity returns of 7.0% over the next decade – far lower than the previous decade of 12.0%.

For developed international equities, with different drivers to the US, we anticipate slower-trend earnings growth due to declines in working-age population growth and relatively lower productivity.

However, these markets have higher dividend yields and more attractive valuation starting points to support returns. Therefore, we expect their total returns to be on par with the US moving forward.

Despite persistent underperformance, we believe emerging markets will continue to lag in coming years, given a continuation of structurally lower return on equity and potential headwinds to growth in China.

Attractive valuations for real assets

The world has transformed from an era of abundance to a regime characterised by ‘scarcity,’ with higher inflation, higher wage price pressures, a move away from peak globalisation and more geopolitical uncertainty.

This, alongside improved diversification of traditional portfolios, is a backdrop that is likely to support higher real assets prices, creating strong returns driven by growth and profitability.

For US listed REITs, we expect annualised returns of 8.0% over the next decade. Global listed REITs are expected to be similar (8.1%) given a slightly higher dividend yield and better valuations after lagging returns in 2023.

Listed (and core) private real estate returns tend to be similar over the long run, reflecting the likeness of the asset classes. During 2023, listed markets rose while private market returns were negative.

As a result, we expect somewhat higher returns in private markets (7.3%) in the next decade. Expected total returns for global listed infrastructure also appear attractive at 7.8% over the same period.

Commodity prices will be supported by the secular backdrop, including recent underinvestment in supply, investment in energy transition, and global geopolitics.

For commodity returns, a higher level of interest rates boosts the expected return on collateral, offset slightly by some drag from the roll yield.

This should support strong natural resource equity returns over the coming decade (8.8%), alongside low current valuations and high free cash flow growth.

Jeffrey Palma is head of multi-asset solutions at Cohen & Steers. The views expressed above should not be taken as investment advice.

In the shifting economic landscape, investors should start to consider buying income-generating assets, as they should benefit the most from the Bank of England’s loosening monetary policy, according to Tom Stevenson, investment director at Fidelity International.

One more base-rate cut is priced in for later in the year, but it is the nature of the cut that will determine the direction of the market, not the cut itself.

“If central banks are expected to cut rates simply because inflation has been brought under control, it generally benefits the stock market. Lower rates make dividend-paying stocks more attractive and reduce borrowing costs for companies,” Stevenson said.

“But things are different if rates are being cut to deal with a recession. Investors must weigh the potential benefits against the negative impact on corporate profits and may be inclined to sell shares if they believe a recession is imminent.”

While bonds might be the first asset class that comes to mind as a beneficiary from a falling rates environment, Stevenson selected four funds from Fidelity’s Select 50 list that belong to two less talked-about sectors to “allow investors to balance potential gains with the risks associated with an uncertain economic outlook”.

For those looking to reposition their portfolios, the first fund to consider according to the investment director is First Sentier Global Listed Infrastructure.

Performance of fund against sector over 1yr

Source: FE Analytics

It currently yields 3.3% and invests in infrastructure companies, which Stevenson said stand to benefit from lower rates.

“The fund is open-ended but avoids liquidity problems by investing in the shares of listed infrastructure companies (one holding is Britain’s National Grid) rather than in infrastructure assets themselves,” he said.

For fans of investment companies, another “solid choice” in this area is the £2.4bn International Public Partnerships trust.

Performance of trust against sector and indices over 1yr

Source: FE Analytics

The strategy provides exposure to “essential assets” such as hospitals and railways and currently yields 5.6% while trading at a 17% discount.

On the property side, Stevenson highlighted the Balanced Commercial Property trust.

“Yielding 5% and trading at a 18.45% discount, it offers potential upside as borrowing costs decrease,” he said.

It is one of the largest physical UK property trusts available investing in prime UK commercial property which has had the same manager, Richard Kirby, since launch.

The trust is also recommended RSMR analysts, who said it was a “core holding”, noting the “consistent monthly income” makes it “attractive for investors as an alternative source of yield from fixed income and equity”.

In the past year, it soared above its peer group, as the chart below shows.

Performance of trust against sector over 1yr

Source: FE Analytics

“Property and infrastructure investment trusts can benefit in another way from interest rate cuts: they tend to have borrowed money, so falling rates should cut their interest bills,” Stevenson explained.

The final pick was the iShares Environment & Low Carbon Tilt Real Estate index fund, a passive strategy that tracks the performance of the FTSE EPRA/NAREIT Developed index. A “sustainable investment option” in the real estate sector, the fund is currently yielding 5%.

Savers have a multitude of options at present for their cash, with savings rates relatively high (and beating inflation), markets coming off a small de-rating and mortgage rates remaining higher than the past decade despite being likely to fall in the coming months as interest rates are cut.

To this end, analysts at interactive investor looked at the potential benefits of two of the most common options people use when they have additional savings to put away – paying off their mortgage early or investing in their pension.

Much comes down to the expected level of return in the coming years, the data showed. To work out the differences, ii researchers looked at someone with a £200,000 mortgage with a 25-year term paying between 4% and 5% in interest each year.

They then calculated overpaying an additional £200 per month, which would result in the mortgage ending six years early. For the example, interest rates are assumed to be static. This is ‘Option 1’ in the below table.

This is pitted against investing the additional £200 per month into a pension, shown as ‘Option 2’. Both are assumed to benefit from pension tax relief.

‘Option 3’ is the same methodology as Option 1, but assumes that the pension tax relief has been removed.

Table of returns under different scenarios

Source: interactive investor

In the first scenario, with interest rates at around 5% and investment returns of around 3% savers would be better off with Option 1 – overpaying their mortgage – to the tune of almost £28,000.

If rates are assumed at 4%, with returns of around 4%, there is little to choose between Option 1 and 2. However, if markets boom over the period, making 7% per year on average (above the long-run average for stock markets) pension investing is the best choice, making almost £40,000 more than overpaying the mortgage.

Craig Rickman, personal finance and pensions expert at ii, said: “As you may expect, the gap between interest rates and expected investment growth result in different outcomes. Put simply, if the interest rate is higher than the anticipated investment growth, overpaying your mortgage first and then adding to your pension is the preferable option.”

However, he noted that, when choosing between the two options, the rate of tax you pay could be a “crucial factor” as those in the higher-rate and additional-rate tax bands can gain 40% or 45% upfront relief, respectively, on pension payments.

“Paying into a pension can not only trim your tax bill but may also help you to swerve or reduce the high-income child benefit charge or keep your personal income tax allowance. It’s vital to factor this into any decision you ultimately make,” he said.

This discussion is particularly pertinent at present, with the recent fall in mortgage rates potentially shifting the conversation.

People’s decision will also come down to circumstance. For example, investing in a pension is a risk, while overpaying the mortgage is a guaranteed benefit that would leave individuals debt free much quicker, something he described as “the holy grail of financial freedom”.

But that is not the only choice, as the numbers above show. He said the arguments for using spare cash to boost your pension are “equally strong”, but do require savers to understand investment risk.

“There's no one-size-fits-all answer here – both options can improve your long-term financial security. The right path for you will depend on your individual circumstances, including your financial goals, current mortgage terms, tax position, and risk tolerance,” said Rickman.

“For those torn between the two, the good news is the decision isn’t binary. You can choose to split any surplus savings or income between reducing your mortgage and boosting your pension.”

Fourteen global emerging markets (EM) funds are less risky than the FTSE 100 index, data from FE Analytics has shown, even though countries in the EM region are typically more volatile.

To evaluate this, Trustnet looked at the FE fundinfo Risk Score. This metric evaluates relative risk by assigning a baseline risk of 100 to the FTSE 100 and of 0 to cash, and then ranking funds on this scale based on their performance over the past 18 months to three years.

We begin with the least risky fund of the 168 in the sector – the Allspring (Lux) Worldwide Emerging Markets Equity Income fund.

This $105m strategy co-managed by Alison Shimada and Elaine Tse has a risk score of 59, but it doesn’t score as well on other risk measures. For example, it has one of the highest Sortino ratios, which measures the volatility of a fund specifically in bear markets.

It also has a negative return of 12.1% over three years, a timeframe when most other funds in the list grew at a double-digit pace.

Source: FE Analytics

With a risk score of 75, the iShares Edge MSCI Emerging Markets Minimum Volatility UCITS exchange-traded fund (ETF) came second place, and with a ongoing charges figure of 0.40%, it was the cheapest fund in the list.

Other passive options included WisdomTree Emerging Markets Small Cap Dividend UCITS ETF (risk score: 91), SSGA SPDR MSCI Emerging Markets Small Cap UCITS ETF (95) and Invesco FTSE Emerging Markets High Dividend Low Volatility UCITS ETF (99).

On the active side, Robeco QI Emerging Conservative Equities leads the way with a risk score of 77 – the least risky and the most popular vehicle, with £2bn of assets under management (AUM).

It has achieved a full FE fundinfo Crown Rating of five and is co-run by a team of five managers, who focus on companies with high dividend yields, attractive valuations, strong momentum and positive analyst revisions.

Its Sortino ratio of 0.64 is the best of the list and the second-best in the whole peer group, giving investors a good chance at protecting their money in down markets but also marking returns when markets are going up. It was the best performer in the list, with a three-year return of 25.2%.

The team invest in low-volatility stocks, aiming to make comparable returns to an emerging market benchmark with a much lower level of downside risk.

Performance of fund against sector and index over 3yrs

Source: FE Analytics

Another sizable strategy with an AUM of £1.6bn, Dimensional Emerging Markets Core Equity had a risk score of 95. It was also among the cheapest active strategies, charging only 0.45%. The fund’s portfolio is generally invested in three buckets: shares of smaller companies; highly profitable businesses; and value stocks.

Next up was the Templeton Emerging Markets Smaller Companies fund, a bottom-up strategy with the key tenet of choosing smaller companies with sustainable earnings power, as RSMR analysts explained.

“The potential for investors is that market valuations tend to be significantly lower than in large-cap stocks whilst the downside is that there can be a lack of liquidity in many of the names.  As a result, investors in the fund should have a long-term investment horizon,” they said.

Another strategy with a focus on smaller companies, JPM Emerging Markets Small Cap is run by FE fundinfo Alpha Manager Amit Mehta and Austin Forey and has featured repeatedly on Trustnet recently, including as part of the top-quartile emerging market funds that weren’t afraid to stray from their benchmarks, the most consistent emerging market fund of the decade and the discounted investment trusts specialist stock pickers are snapping up.

It is a high-conviction portfolio of high-quality companies with “superior and sustainable” growth potential and with a risk score of 99, it is almost as risky as the FTSE 100. While its approach has made a 3.8% loss over the past three years, most small-cap funds have struggled and its longer-term track record is much better, as the chart below shows.

Performance of fund against sector over 3 and 10 yrs

Source: FE Analytics

Other funds that also stood out were abrdn SICAV I Emerging Markets Smaller Companies, AB SICAV I Emerging Markets Low Volatility Equity Portfolio and McInroy & Wood Emerging Markets.

Previously, we also covered the UK small-cap funds less risky than the FTSE 100.

Savers have the chance to snap up inflation-beating deals today, but they must act quickly before central banks continue their rate-cutting cycles.

The Consumer Price Index (CPI) reading in today’s news registered an uptick to 2.2% in headline inflation in July, however 1,558 savings accounts available beat this rate, giving savers the chance to counter inflation’s corrosive action on their purchasing power.

This is the first time this has happened in at least two years – in August 2023 and 2022 there were no deals that could beat the previous month’s CPI readings (6.8% in July 2023 and 10.1% in July 2022).

Moneyfactscompare’s Caitlyn Eastell encouraged savers to secure an inflation-beating deal now, as some of the top savings rates have dropped below 5%.

“It is crucial savers keep on top of the changing market and make the switch to ensure they are not getting a raw deal, especially as we have seen some of the top rate deals drop below 5%. It would not be too surprising to see more providers adjusting their rates in reaction,” she said.

“Since the previous inflation announcement, fixed rates have faced further reductions, so it may be wise for savers to begin considering locking into an interest rate while the majority continue to pay competitive returns.”

Longer-term rates have suffered the most, while shorter-term savers are continuing to be incentivised with higher top rates, despite some drops.

Savings market analysis

Source: MoneyfactsCompare

The best easy-access account available today based on a £10,000 lump sum, is Ulster Bank’s Loyalty Saver, which pays a variable 5.20% yearly, but is only available to new and existing current account customers.

Principality Banking Society offers a bonus rate for 12 months on its Online Triple Access account, paying 5.00% yearly (also variable). For savers who want unlimited access to their cash, Monument Bank pays 4.91% variable every month via Raisin UK.

Fixed-rate deals are only marginally better. The Union Bank of India is the best-payer for one- and two-year maturity accounts, offering 5.25% and 4.80%, respectively. Locking money away for even longer won’t help either, with the best five-year rate available coming in at 4.55% with Al Rayan Bank’s Deposit account, available through Raisin UK.

One area of the market to see improvements has been ISAs, Eastell noted, with new market-leading rates across the board that now match the return of their non-ISA counterparts.

ISA market analysis

Source: MoneyfactsCompare

Virgin Money has a one-year cash ISA paying 5.05%, Nottingham Building Society’s two-year rate is 4.73% and, at 4.26%, the best five-year fixed-rate cash ISA is UBL’s.

On the other hand, notice accounts have seen a dip in top rates month-on-month and now pay below 5%, which may be bad news for consumers looking to maximise their tax-free savings.

“This may not be wholly unexpected, and it would be sensible to expect more reductions to variable rate products alongside the Bank of England’s decision to drop interest rates at the beginning of the month,” said Eastell.

“During this time, it is crucial that savers do not grow complacent with their pots and switch accounts when attractive deals appear to ensure that inflation does not erode their cash.”

Making a case for emerging markets (EM) investing has never been straightforward. There has always been a struggle between the lure of superior returns and the suspicion that, sooner or later, disaster or instability might wipe these out.

Indeed, a series of shocks – including the 1980s’ Latin American debt crisis, the 1990s’ Asian financial crisis and concerns about higher US interest rates in 2013 – have repeatedly driven investors to withdraw their capital, causing a pattern of boom and bust.

Doubts still linger over how many EM countries can actually achieve developed status, or the justification for investing in emerging market equities from the standpoint of returns.

But none of this necessarily means investing in emerging markets isn’t worth it. On the contrary, there are many signals that the best may be yet to come.

So, looking ahead, what is the appeal of investing in emerging market equities and how can stock pickers succeed in this specialist discipline?

Growth on the horizon

When the case for an allocation to emerging market equities is made these days, it usually centres around relative valuation. This is reasonable enough: the asset class has gone nowhere for a decade, while developed markets – led by the US – have gone from strength to strength.

These valuation-based arguments are increasingly being supplemented by a new-found appreciation of emerging markets’ macroeconomic resilience.

Sure enough, we have just gone through the most aggressive Fed tightening cycle in a generation, and most of the major emerging economies have sailed through unscathed. But the case for growth in emerging markets isn’t being discussed nearly enough.

We are constantly told that the golden age of globalisation is at an end, and that emerging markets, as the biggest prior beneficiaries of this trend, will be the most challenged by its reversal.

Yet what we are seeing is not de-globalisation, but de-sinification as the West seeks to grind China out of its system. There will be winners elsewhere in emerging markets as supply chains adjust, new export champions emerge in countries such as Vietnam and Indonesia, and capital flows to these markets.

A shifting centre of gravity

Equities in Mexico, South Korea, Vietnam and India are finally attracting more attention after a decade of neglect.

That’s because, when it comes to the key challenges we are likely to face in coming decades, many of the answers are in the developing world.

If you think about the transition to renewable energy, we're going to require an awful lot of critical minerals, copper and nickel.

If you think about developed markets reviving their manufacturing sectors, we’re going to need an awful lot of steel and cement. And if you think about artificial intelligence (AI), we’re going to need lots of semiconductors.

When I think about all those things, the idea that the world's centre of economic gravity will continue to tilt towards emerging markets seems very plausible.

Macro matters

What, then, is needed to take advantage of this change in headwinds? The extreme nature of cycles in emerging markets means there can be long periods of time when top-down factors are overwhelming.

Some investors will tell you that macroeconomics doesn’t matter, it’s all about finding great companies and focusing on fundamentals. But I would respectfully tell you that it does matter in emerging markets.

If you pick the right companies at the wrong moment, currency moves and stricter lending criteria can send the value of emerging market stocks and bonds into a tailspin. But the results can be stellar when both factors work in your favour. And there are signs to suggest such a period is on the horizon.

We’re still below the 2007 peak in the MSCI Emerging Markets Index at a time when other global stock markets have done well, and more capital has left emerging markets than has flowed in for the best part of a decade.

The result is that asset prices appear undervalued compared to other markets. And from emerging markets, more and more world-class companies are appearing.

World-class companies

Take Taiwan Semiconductor Manufacturing Corporation, better known as TSMC. It has close to a 60% market share in manufacturing chips for third parties, and counts Apple, Nvidia and Qualcomm among its biggest clients.

In the 1990s, it was about twice the size of its nearest competitor, United Microelectronic Corporation. Now, it’s six times the size. It got there by doubling down every time there was a down cycle, while its competitors retrenched.

Nobody knows what the new digital age will look like, or which AI applications will be most successful, but we have a good idea that TSMC will be making the semiconductors powering them. I think the market still misses how much value it could create. 

India, too, has many promising startups, while its larger brands benefit from the public’s growing disposable income. Much of this potential is already reflected in valuations. However, Jio Financial Services is one example of a company whose prospects are particularly bright. 

There are hundreds of fintech companies in India. What makes this one special is that it’s backed by Reliance Industries and has access to all its data. We’re talking about 400 million telecoms customers and 200 million retail customers: that’s a powerful combination.

Patience can be profitable  

We can go quite far in imagining where the tilt towards emerging markets might take us.  

If the early 2000s were about the integration of China and the West, the 2020s are poised to see something much broader: 4 billion people in 100-plus EM countries that are doubling down on trade with both sides of the geopolitical divide. 

Evidence of this is already becoming economic reality, as emerging market countries trade with each other more than ever. This is increasingly happening in currencies other than the dollar, further liberating emerging markets from their historical dependence on US policy. 

The profits from this new wave of globalisation are likely to be reinvested into emerging markets themselves. It could be a far more powerful and self-sustaining trend than anything that has unfolded before. 

Anticipating these longer-term dynamics is more straightforward than trying to time the turning points in cycles: collapse is followed (at some point) by supply withdrawal and stimulus, which is followed even later by recovery. So, if you have the luxury of a long-term investment horizon, patience can be profitable. 

Will Sutcliffe is head of Baillie Gifford’s emerging markets equities team. The views expressed above should not be taken as investment advice.

Fund managers around the world have become increasingly downbeat in their outlook for the economy following the market crash in early October, a closely watched sentiment survey has found.

The latest edition of the Bank of America Global Fund Manager Survey, which polled 189 asset allocators running a total of $508bn, was carried out between 2 and 8 August – so was running when global stocks tanked on Monday 5 August.

As has been discussed widely, several factors combined to spark the sell-off including worries that the US economy could fall into recession, the unwinding of the Japanese carry trade and fears that US tech stocks were overvalued.

Below, we look at seven charts from the Bank of America Global Fund Manager Survey to see how investors were affected by the August stock market drop.

Bank of America Global Fund Manager sentiment indicator

Source: Bank of America Global Fund Manager Survey, Aug 2024

Bank of America’s broadest measure of fund manager sentiment revolves around the percentile ranking of respondent’s growth expectations, cash levels and equity allocations. This fell to 3.7 in August, down from 5 in July.

Part of this was down to fund managers’ increasing their cash levels for the second month in a row, from 4.1% to 4.3%, as the market sold off in the opening week of the month.

Net % of fund manager expecting a stronger global economy in next 12 months

Source: Bank of America Global Fund Manager Survey, Aug 2024

But a major source of the fall in sentiment can be seen in the chart above – confidence in the economy has collapsed to an eight-month low. The August survey found a net 47% of investors expect a weaker economy in the next 12 months, down 20 percentage points from the previous survey.

Some 52% of managers think the most likely scenario for the global economy is ‘below-trend growth and above-trend inflation’ (down from 65% last month). One-third expect ‘below-trend growth and below-trend inflation’, which is the most since November 2020.

What fund managers consider to be the biggest ‘tail risk’

Source: Bank of America Global Fund Manager Survey, Aug 2024

Because of this, a potential recession in the US has become the biggest ‘tail risk’ for global asset allocators. In July, just 18% of investors cited this as the main risk; in the latest survey, 39% said they worry about this the most.

The number of managers worried about geopolitical conflict, higher inflation, an artificial intelligence (AI) bubble or a US election ‘sweep’ (where one party takes the presidency and a senate majority) has fallen as macro concerns mounted.

What is the most likely move for the Fed in the next 12 months?

Source: Bank of America Global Fund Manager Survey, Aug 2024

However, the core assumption among fund managers is that the global economy will encounter a ‘soft landing’ (a slowdown rather than recession) in the next 12 months, with 76% expecting this outcome.

That said, investors now expect a greater degree of policy easing from the Federal Reserve will be required to achieve this. Around 60% of managers anticipate four or more rate cuts in the US over the next 12 months, with 94% expecting the first at the Fed’s September meeting.

That said, just 8% of managers expect ‘no landing’, down from 18% last month. Some 13% think a ‘hard landing’, or recession, is on the cards in the coming 12 months, up from 11%.

Net % overweight equities and bonds in 2024

Source: Bank of America Global Fund Manager Survey, Aug 2024

During August, the net overweight to stocks has fallen to 11%, down from 33% last month. This is managers’ lowest allocation to equities since January 2024 and the largest month-on-month drop since September 2022.

The allocation to bonds shifted from a net 9% underweight in July to a net 8% overweight this month as investors rotated into safer havens.

Month-on-month change in manager positioning

Source: Bank of America Global Fund Manager Survey, Aug 2024

The above chart shows this rotation in more detail, with investors increasing their allocation to defensive areas of the market (bond, cash and healthcare) while moving away from riskier assets (stocks, Japan, tech, banks and commodities).

What managers believe will lead the new US equity bull market

Source: Bank of America Global Fund Manager Survey, Aug 2024

Looking forwards, fund managers continue to believe that large-cap growth stocks will lead the next US bull market, much like they have over recent years. However, confidence in this view has been shaken: 36% of investors backed large-cap growth stocks in August, down from 47% last month.

In contrast, there’s a growing number of asset allocators looking to large-cap value stocks as the likely leaders of the next bull market, with 21% backing them – up from just 13% in July.

Recent predictions of multiple rate cuts by the Federal Reserve this year may prove disappointing for investors, according to FE fundinfo Alpha Manager Richard Hodges, who runs the $2.3bn Nomura Global Dynamic Bond fund.

His base case is that the Fed will indeed cut rates, allowing other central banks to follow suit, but he is less confident than the market. He noted that multiple rate cuts are priced into the remainder of 2024, something that gives “ample room for disappointment”.

In addition, in the short term the Alpha Manager predicts that political uncertainty in this big year of elections, and less liquid summer markets, will lead to much greater volatility in the fixed-income market.

For this reason, Hodges continues to prioritise its existing investment strategy, focusing on allocations that are low-risk and could adapt to unexpected decisions from the Fed.

For example, the fund will continue to use credit default swap (CDS) index-based hedging to protect investors against a change in risk sentiment. This CDS-based protection accounts for almost 30% of the portfolio.

Additionally, the fund has significant exposure to European banks and financials such as Barclays, which is currently the firm’s sixth-largest holding.

This exposure to senior financials offers low risk if the Fed chooses not to cut rates further, but also provides the potential for stronger returns if a more aggressive campaign begins, he said.

Performance of Fund vs the sector

Source: FE Analytics

However, over the longer term he remains confident on the prospects of bonds, particularly those at the riskier end of the market. He noted that rate cuts will “lead to a positive environment for a wide range of risk assets”.

As such, the fund has positions in emerging markets, convertibles and European financials that will
“benefit from the realisation of that environment”.

UK inflation has ticked up again for the first time this year, as the consumer prices index (CPI) rose to 2.2% in the 12 months to July 2024 from 2.0% in June, Office for National Statistics figures show.

The increase was largely expected and the main culprit was energy prices, which have not dropped to the same extent that they did last year, AJ Bell director of personal finance Laura Suter explained.

“The price of energy actually fell in the month, but due to the way inflation is calculated energy prices didn’t fall by as much as they did in July last year, which translated to an increase in the figures,” she said.

“It’s a common story across a number of areas, where prices fell in the month but were higher than a year ago – having the effect of pushing up headline inflation. We saw a similar story in petrol and diesel prices and in second-hand cars.”

The headline CPI figure of 2.2% doesn’t tell the whole story, however. Core inflation (which excludes more volatile elements like energy, food, alcohol and tobacco) fell to 3.3% in July from 3.5% in June, its lowest level since September 2021.

Services inflation, which is a particularly sticky component, also dropped from 5.7% to 5.2% – but this was still elevated according to Richard Carter, head of fixed interest research at Quilter Cheviot.

“The problem the Bank of England [BoE] has is that services inflation remains elevated at 5.2% and, with wage growth remaining well above the headline rate of inflation, there are many risks out there should the BoE move too quickly in cutting rates,” he said.

“Indeed, with core CPI at 3.3%, we would expect November to be the earliest date for the next rate cut, unless we see a significant deterioration of the economy in the meantime. Any further, unexpected rises, will start to ring alarm bells just as consumers and businesses crave further rate cuts.”

Annual CPI inflation rates

Source: Office for National Statistics

Indeed, markets are now expecting rates to dip below 4% towards the end of next year, as noted by Ed Monk, associate director for personal investing at Fidelity International, who predicted one more cut in 2024.

While lower rates have tended to be positive news for stock markets, investors should always be aware of the wider picture – that rates are coming down because there is less momentum in the economy.

“The Bank of England has begun to ease monetary policy and will be watching growth data closely for signs of a more sudden slowdown that could accelerate the timetable for rate cuts,” he said.

“As rates fall cash will become less attractive. Many investors have sought the safety of cash deposits this year as rates have stuck above the rate of inflation, but they may be forced to reassess as interest rates falls. Bonds, which have disappointed for some time, may become more attractive if cuts come through more quickly.” 

Craig Rickman, personal finance and pensions expert at interactive investor, also invited investors to remain alert. Despite the significant drop from the dizzying double-digit heights that battered finances two years ago, “the threat to long-term wealth creation hasn’t disappeared completely”, and savers and investors “would be wise to bear this in mind when making decisions with their money”.

“If left unchecked, price rises can have a punishing impact on your financial future, silently eroding the ‘real value’ of your portfolio and reducing its future buying power. That’s why it’s essential to make sure your savings and investments aim to beat inflation,” he said.

“Hunting for the best cash savings rates, making the most of your tax wrappers such as SIPPs and ISAs, and keeping your portfolio costs low are three savvy ways to mitigate the impact of price rises on your wealth.”

Market wobbles can represent a good time for investors to get into the market – particularly those who have never done so before and have a long time horizon for their money.

The recommendation from most professionals is to get in when stocks are cheap and sell when they are expensive. Although there is no guarantee that stocks are now good value, they are at least lower in value than they were before the summer started, due to a slide downwards over the past few months that culminated in last week’s brief sell-off

As such, Trustnet asked Quilter Cheviot head of fund research Nick Wood to come up with a perfect portfolio for a young person starting their investment journey.

“With it potentially not being touched for 20, 30 or even 40 years (if for retirement), there is a real opportunity to take a risk knowing that equities deliver the greatest growth potential over the long term,” he said.

His portfolio includes both public companies as well as private equity and is largely made up of investment trusts, which he said look good value as “plenty are on meaningful discounts – where the share price is lower than the net asset value (NAV) of the holdings”.

“Investment trusts are inherently more volatile than open-ended funds, but again the long time horizon means this is less of an issue as time is very much on the investor's side,” said Wood.

His highest conviction is in JPMorgan Global Growth & Income, where he allocated 30% of the portfolio, despite it being one of the rare strategies trading on a slight premium of 0.8%.

The trust has been the best performer in the IT Global Equity Income sector over three, five and 10 years, although it was one of the worst-affected by the most recent drop in equity markets over the past few months.

Performance of fund vs sector and benchmark over 10yrs

Source: FE Analytics

“This trust provides investors with broad global equity exposure and draws on JP Morgan’s investment process, resulting in a portfolio of only the firm’s highest conviction (top 50-90) companies being selected on the basis of quality earnings that are growing faster than the market,” said Wood.

“It pays a dividend of 4% of net asset value every year and has the ability to borrow to invest (gearing), meaning shareholders should benefit over the long term.”

To go alongside this, he put 20% of the pot in Scottish Mortgage, the high-growth portfolio from Edinburgh-based asset manager Baillie Gifford.

The trust has been choppy, down 38.1% over the past three years, but despite this remains the best performer in the IT Global sector over the past decade. Its shares can be snapped up at an 9.5% discount to NAV.

Performance of fund vs sector and benchmark over 10yrs

Source: FE Analytics

“Perhaps one of the UK’s best-known investment vehicles, the team at Scottish Mortgage run an investment philosophy that is truly long term, seeking the next generation of market leaders,” said Wood.

He highlighted the trust’s “significant outperformance” relative to its peers during the initial stages of the Covid pandemic in 2020, as well as its dominance during the low-growth, low interest rate-environment of the past decade.

Much of its success came from unlisted companies, such as the current largest private equity position in the trust: Elon Musk’s unquoted SpaceX.

“Up to 30% of the portfolio can be invested in unlisted investments, capturing the opportunity before any initial public offering (IPO),” said Wood.

“As such, the trust is very much set up in the growth space, and with inflation coming under control and rate cuts due to be implemented in the US, conditions are positive for the portfolio in the short term, while also remaining bright in the long term thanks to its focus on transformational trends.”

To enhance the private equity offering even further, Pantheon International was also added and given a 15% weighting. Because private companies are riskier than their public counterparts, its shares sit on a wide discount of more than 37%, but could be good value if the trust soars.

The trust has been a third-quartile performer in the IT Private Equity sector over the past three, five and 10 years, but has risen over the past 12 months to the second quartile, slipping back in recent days, as the below chart shows.

Performance of fund vs sector over 1yr

Source: FE Analytics

“With a long-term time horizon, private equity has proven capable of providing excellent returns to patient investors. The underlying portfolio is made up of over 500 companies and spans buy-outs, growth capital and venture capital, whilst being diversified geographically and by sector,” said Wood.

“This trust pays a dividend, which over the years will compound for investors, while also providing opportunities for growth via exits.”

He also allocated 15% to Bill Ackerman’s Pershing Square Holdings, a fund with a “significant activist approach”. It looks for poorly run companies that can be turned around with corporate action – something that has worked out well over the past five years with the trust up 164.3%, the best return in the IT North America sector.

Performance of fund vs sector and benchmark over 5yrs

Source: FE Analytics

Wood said the trust is a combination of “high-quality stocks” (currently 12), providing “differentiated exposure to the US alongside that held by Scottish Mortgage and JPM Global Growth and Income.”

The share price discount of 28.5% is exceptionally wide as this strategy is perceived as riskier than a traditional portfolio. However, the Quilter Cheviot head of fund research noted that this makes now “a good time to invest”. 

Lastly, he selected something closer to home with a 20% weighting to Schroder Recovery, the UK fund run by the firm’s value team. It has consistently outperformed expectations, beating the market over the longer term even when the style of buying out-of-favour companies was itself unloved.

“With the UK still out of favour, there is potentially a double discount, with the team selecting the cheapest companies within the UK that have suffered short-term setbacks,” he said.

“Due to the contrarian nature of the fund, returns can diverge from its benchmark index (FTSE All-Share) but this should mean plenty of opportunities for above-average returns over the long term.”

The only non-investment trust pick on the list, the fund has been a top-quartile performer over the past three and five years, although it has been below-average more recently.

Performance of fund vs sector and benchmark over 5yrs

Source: FE Analytics

This may be due to the team’s current bias towards small and mid-sized companies, which has worked well in pockets when expected rate cuts have boosted investor sentiment, but has struggled in the very short term after the recent market wobbles.