The UK continues to be a happy hunting ground for mergers and acquisitions, with a record 19 deals on the table for companies in the FTSE 350, according to data from Peel Hunt.

Charles Hall, head of research at the firm, said low valuations and willing sellers are two of the main reasons why UK companies are being bought up in their droves.

Bids worth £47bn are live, but this figure rockets to £97bn when factoring in bids announced last year and completing this year, as well as de-listings.

Of the 40 transactions announced year to date, 19 were for companies in the FTSE 350, five in the FTSE SmallCap and 14 on AIM.

Comparatively, there were 39 transactions announced in the entirety of last year, with just two from the FTSE 350, 14 in the FTSE SmallCap and 19 on AIM.

In terms of sectors, the biggest areas to be affected are tech (£10bn) and real estate (£4.5bn), as the below chart shows.

Bid activity by sector

Source: Peel Hunt

Companies representing 10% of the total value of the FTSE 250 are potentially leaving the market in the span of just nine months, including the UK’s largest fund supermarket Hargreaves Lansdown, which is included in the study as it wasn't promoted to the FTSE 100 until after its bid.

However, the effects could be even more directly felt in the FTSE SmallCap space, where stocks will be promoted to the FTSE 250 to replace their larger peers being bought up.

There was a drop in activity during the third quarter of the year, which Hall suggested was due to the normal summer lull, but he said more deals are likely in the latter half of this year.

“Given the improving economic environment and a more accommodating lending market, it feels highly likely that the elevated rate of M&A will continue,” he said.

Earlier this year Hall called on the Labour government to get to grips with rampant M&A activity, warning that the UK market will continue to shrink if nothing is done.

This time around he noted it was of particular importance for smaller companies. Typically this is solved by initial public offerings (IPOs) and although this area is “starting to emerge from hibernation”, there remain “structural issues in the UK that need to be addressed to retain a healthy UK equity market”.

“We believe we need to address the demand side, if the UK is to retain its growth companies and to ensure that the equity market is able to provide long-term growth capital. In our view this can be delivered through pension reform, ISA reform and a national wealth fund,” he said.

However, it is not all bad news. Investors in bid-for stocks have profited mightily. The average premium of these offers is 40%, with some materially higher. The report highlighted Wincanton (104% above the share price on the day of the bid), Spirent (86%), International Distributions Services (73%) and Keywords Studios (69%).

Most of the money is coming from corporate buyers (68% of the bids have come from rival firms) as the rate environment and economic outlook have become clearer, said Hall.

“It has been particularly noticeable that corporates have been the main acquirers. This suggests greater confidence in the economic outlook and the interest rate environment. It also shows the attractiveness of UK companies and the potential for synergies in a low-growth environment,” he said.

By contrast, it has been “surprising” to see relatively low activity from private equity, where an estimated $4trn remains on the sidelines.

“We expect this to change as financing conditions improve, which means that private equity is likely to be a more active acquirer going forwards,” said Hall.

You’ve probably heard the phrase ‘the value of your investments can go down as well as up.’ Well, they do. Regularly. By the minute.

The extent to which you’re comfortable with fluctuations depends on the returns you want to achieve and over what time. The key consideration to remember is the correlation between risk and return. In general: the greater return you hope to achieve, the greater the risk of losing money.

The starting point for an investment manager in constructing a portfolio is understanding the ebbs and flows of our economy and their impact on investment portfolios.

Why are economic cycles important for investors?

Over time, economies fluctuate. They expand and contract. During expansion, indicators such as GDP, employment and consumer spending rise. Once you’ve passed the ‘peak’ when some – or all – of these measures start to fall, you’re entering the contractionary phase. That continues until you’re past the ‘trough’ when economic indicators start improving again.

Economic cycles are difficult to time but perpetuate approximately every five years.

Interest rate cycles also matter to investors

As countries’ economies expand and contract, the central banks of those countries try to keep things within acceptable boundaries.

A powerful tool they use is the setting of interest rates. When economies expand, they increase rates to have a ‘cooling’ effect. During downturns, they decrease rates, lowering the cost of borrowing, incentivising spending, and giving businesses and governments more capability to invest.

It’s a rather blunt instrument with far-reaching impacts on consumer spending power but it has proven to be effective. This is important for an investor because separate phases of economic cycles and interest rate cycles benefit different types of assets.

What equity balance is right for a portfolio?

Before you can answer this question, you need to understand what returns you hope to achieve over a specific time. You also need a clear sense of how much risk you are prepared to take on.

For example, if you’re in it for the medium term, you’re likely to have a limited appetite for risk because the shorter-term volatility of equities might not be for you.

Equities (shares in companies) perform well when the economy is growing, but poorly in contraction. In the 2008 global financial crisis, the FTSE All World Index declined by 58%.

Assets such as bonds, alternatives, and cash tend to perform more steadily, so adding them to your portfolio can insulate you somewhat from fluctuations in equities.

So, in the shorter term, a conservative approach with a higher allocation to bonds, alternatives and cash is appropriate. For a longer-term horizon, a more aggressive approach with a higher allocation to equities is suitable. Short-term volatility is not such a problem if you have an eye on longer-term returns.

There are only a few instances in the past century where rolling 10-year equity returns are negative, while for shorter rolling periods equity markets are often in negative territory.

In the past century for the US equity market there are only three periods where 10-year returns were negative, the second world war, 1970’s inflation and the global financial crisis.

Eliminating human bias in investing

Each economic cycle is different. And it's important to understand those differences and alter the make-up of portfolios to reflect the challenges and opportunities posed by a specific cycle.

When constructing a portfolio, the aim is to try to limit the impact of human bias by adopting a strict risk profiling framework, i.e. you shouldn't pick an asset or a sector simply because you like it.

Reducing bias as much as possible and the danger of over- or under-committing to risk aligns your asset allocation to match your goals over a typical economic cycle. The only problem is no economic cycle is typical, further adjustments are required.

Equities

Some equities are considered less risky than others. High-quality companies with strong fundamentals, such as consistent earnings growth, robust balance sheets and deep economic moats, are often more resilient during economic downturns. Valuation is crucial to avoid overpaying, and diversification helps mitigate risk.

Fixed Income

Bonds are a key component of a diversified portfolio. Including bonds in a portfolio should give you solid returns over the economic cycle and serve as a counterweight to the negative performance of equities during contraction or recession.

Understanding the interest rate cycle is central for fixed income investing. When interest rates rise (typically during an economic expansion) bond prices fall, during these periods interest rate risk should be reduced, and credit risk is favoured to enhance returns.

When the cycle turns and economies slow down or contract, central banks cut interest rates to stimulate growth. This stage in the cycle is best for traditional fixed income.

More interest rate risk is favourable and provides a ballast to equity market volatility. Here, government bonds and high-quality investment grade credit are favourable.

What is the benefit of alternative investments?

You can very crudely think of equities and bonds as two sides of a seesaw; there is often an inverse correlation in how they behave, particularly during recessions. Alternatives can do something different. Examples of alternative investments include hedge funds, commodities, and private equity.

We prefer liquid alternatives with a low correlation to equities and bonds and target returns in excess of cash.

Equity and bond prices often fall further and more quickly than when they rise. With this asymmetry in mind, protection against the worst periods is valuable.

‘Tail protection’ enhances overall portfolio resilience and provides a ‘smooth ride’ over a market cycle. This is particularly the case for lower-risk profiles with less tolerance for drawdowns.

Tom Hibbert is a multi-asset strategist at Canaccord Genuity Wealth Management. The views expressed above should not be taken as investment advice.

Bestinvest has added seven strategies to its Best Funds List and removed eight since its last update in March 2024. Alliance Trust, which is undergoing a merger with Witan, is among the new entrants alongside three regional equity funds: Liontrust European Dynamic, M&G Japan and JPM UK Equity Core.

Two exchange-traded funds also made the grade: SPDR MSCI ACWI ETF and Xtrackers S&P 500 Equal Weight ETF.

Liontrust European Dynamic is managed by James Inglis‑Jones and Samantha Gleave, who invest in companies with strong cashflows. Jason Hollands, managing director of Bestinvest, said: “Their process allows them to switch between growth and value stocks depending on the market environment.”

It is the best-performing fund in the IA Europe Excluding UK sector over five years to 1 October 2024 and sixth over three years. The £1.6bn fund has struggled in relative terms during the past 12 months, however, dropping to the fourth quartile within its sector.

Performance of fund vs sector and benchmark over 5yrs

Source: FE Analytics

M&G Japan, helmed by FE fundinfo Alpha Manager Carl Vine, and JPM UK Equity Core also have top-quartile three and five-year numbers but below-average one-year track records.

The Best Funds List does not use past performance as a primary selection criterion, however. “Using it to predict the future is about as accurate as rolling a dice,” said Hollands.

Instead, investment professionals at wealth manager Evelyn Partners (Bestinvest’s parent company) look for “a manager that invests their own money into the fund, someone who has a clear set of objectives, or a manager that adopts a high-conviction approach rather than hugging the benchmarks,” he explained. Being prepared to limit the size of the fund is also a key consideration.

M&G Japan was added to fill a gap in the Best Funds List for a core-plus Japanese option. “The fund is benchmark aware when it comes to sector exposure but takes risk at the stock specific level. It therefore avoids the style bias that typically drives the performance of many other Japanese funds,” Hollands explained.

“Similarly, JPM UK Equity Core is a low cost, index plus strategy, which takes incremental overweight and underweight positions relative to the benchmark. The investment process is highly quant driven.”

Also added to the list was Evy Hambro’s BlackRock Gold & General, which was included after the gold price hit fresh highs in sterling terms at the end of last month. The fund invests in equities that derive a significant proportion of their income from gold mining or commodities, such as precious metals. Its performance is closely correlated with gold mining stocks, which can be volatile but have risen sharply since March 2024.

Performance of fund vs benchmark over 5yrs

CHART 20241002_Bestinvest_3

At the other end of the spectrum, Janus Henderson Strategic Bond was removed ahead of co-manager John Pattullo’s retirement in March 2025.

LXI REIT was expelled following its merger with LondonMetric Property in March, while CT UK Commercial Property also lost its place.

Two ethical strategies followed suit: CT Responsible Global Equity, which suffered outflows of £175m during the first half of this year, and JPM Global Macro Sustainable.

Two long/short funds, Amundi Sandler US Equity and CIFC Long/Short Credit, were shown the door, as was Ashmore EM Local Currency Bond.

Generally speaking, funds are taken off the list if “a manager changes and we feel the replacement is unproven, or we believe changes in fund size mean the fund will need to be managed differently,” Hollands said.

Bestinvest’s latest Best Funds List contains 137 funds, including 30 investment trusts, 34 low-cost passive funds and 18 strategies focusing on environmental, social and governance (ESG) considerations.

Scottish Mortgage has dropped from its podium as interactive investor (ii)’s most-bought trust this September, a place it held for an entire year. In its stead, BlackRock World Mining, which invests in mining and metal companies globally, climbed the ranks gaining eight positions since August.

This was the result of a diminished enthusiasm in technology and renewed interest for commodities, according to ii’s Kyle Caldwell.

The trend was also evident with the Allianz Technology trust losing one position and Polar Capital Technology exiting the top 10 entirely.

There were also signs in the open-ended space. Here, the L&G Global Technology index, once the most-bought fund, moved down to fourth place in favour of Vanguard LifeStrategy 80% Equity.

“Whenever there’s a strong short-term period for a sector or theme [such as technology], it’s prudent to reexamine whether your overall exposure needs trimming back to keep a lid on risk,” he said.

Another notable mover, Fundsmith Equity made a comeback after taking a break from the spotlight last month, when it slipped off the list for the first time since tracking began in 2018.

Source: interactive investor

Within the equities ranking, technology was ousted, with Amazon exiting, while oil took centre stage. BP became the new most-bought stock among ii clients and Shell also joined the cast, after both fell more than 9% over the month on the back of a weaker oil price, as ii’s head of markets Richard Hunter noted.

The “generous” dividend yields of 5.7% and 4.2% respectively were the cherry on top of the cake and were enough to lure investors back in.

Other “perennial” income-generating stocks were on the list, including financial wealth providers and insurers Phoenix Group and Legal & General, which were joined by Lloyds Banking and Rio Tinto. More usual suspects included Rolls Royce and Nvidia, whose popularity continued in September after some scathing in the previous month.

“Having suffered something of a summer lull, Nvidia shares have more recently returned to market darling status and continue to feature highly in the ii most bought list. The shares added a further 12% in the month taking the year-to-date gain to a stellar 152%,” said Hunter.

“Rolls-Royce remains well regarded by investors with the share price adding another 14% in the month to now register a gain of 78% so far this year.”

Investment trusts have had a tough few years, with discounts widening across the board, thanks to factors such as pivotal changes in the interest rate environment hitting the alternatives market and Liz Truss’s mini-Budget in 2022.

Throw in the UK’s interpretation of the European cost disclosure directive, which created an obstacle that was removed only a few weeks ago, and it is clear to see why investors may have been hesitant.

But this is exactly why some managers find that now is the best time to get involved. One such person is Alastair Laing, who is in charge of Capital Gearing, a specialist multi-asset trust that derives all its equities allocation from trusts.

“A range of things have caused a big dislocation and large discounts to emerge, which for us is exciting,” said Laing. “There's a lot of doom and gloom around investment trusts, but that is typical when discounts are widening out. It's happened before and the narrative changes as to why, but financial markets are cyclical.”

Below, he shares some recent examples of high-quality managers of well-run portfolios that are trading on a discounts that should provide strong gains over the long term.

A good example of a position that he has built recently is the Smithson Investment Trust, run by Simon Barnard and Will Morgan.

Performance of fund against sector and index over 1yr

Source: FE Analytics

It is the closed-ended mid-cap equivalent of Terry Smith’s

“It performed incredibly strongly and was very in demand and trading on a premium for a while, so it wasn't of interest to us until later, when it had a really tough period and moved to a discount. Barnard is a good manager with a good process which you can now get on the cheap,” Laing said.

For the manager, the turning point was earlier this year, when Smithson was supposed to be involved in a continuation vote that was to be held at the annual general meeting.

It was cancelled by the board at the last minute and at that point, “all the stars aligned” for Laing, who took the opportunity to buy the trust on a discount and engage with the board.

“We built quite a big position and, along with other shareholders, made the case that cancelling the continuation vote was not appropriate corporate governance.”

The board listened by reinstating the continuation vote and also started a “very material” share buyback scheme. “We love share buybacks at discounts, that's risk-free upside,” Laing said.

Another example of a trust that he has bought is RIT Capital. It has an “outstanding long-term track record” but has fallen to big discounts since 2022, reaching today’s 30%. The trust was also “hit badly” by cost disclosure, having had to disclose ongoing charges of 4.5%. That's now gone away with the Financial Conduct Authority’s intervention.

Performance of fund against sector and index over 1yr

Source: FE Analytics

“We like the process, we like the manager and again historically, the board didn't do buybacks,” said Laing. “We built a position, engaged with the board and now it is buying shares. Buying shares at a 30% discount is very powerful.”

A final, more esoteric example is the £1.2bn hedge fund BH Macro. During the global financial crisis, Brevan Howard earned a solid reputation for delivering strong returns while most investors experienced losses.

Performance of fund against sector and index over 1yr

Source: FE Analytics

The trust was also successful during the market volatility of 2022, but last year was tougher, and the NAV total return was down 1.8%, as Winterflood analysts noted.

They said this discount is “an attractive entry point for access to a manager with an attractive record of protecting capital in difficult times. However, it may require corporate action for the discount to narrow, given that Investec and Rathbones combined hold a 25% stake according to Bloomberg, which is seen as an overhang by the market.”

The “very stable” underlying NAV has been eclipsed by the share price, which has gone from about a 10% premium to an 18% discount over the past 18 months, and Laing bought in on double-digit discounts, again engaging with the board and initiating share buybacks.

All of these positions amount to almost 1% of the Capital Gearing portfolio and were built over the past 12 months.

“We don't think those will be quick returns, but they will outperform the underlying asset class over the next three or four years,” said Laing. “That's how we seek to more reliably generate alpha than trying to beat the market at stock           picking.”

Diversified Energy Company is now the UK’s most-shorted stock, knocking Petrofac off that perch for the first time since November 2023.

Investment firms that bet against the natural gas company last month included Arrowstreet Capital, Bridgewater Associates, JPMorgan Asset Management, Millennium International Management, Point72 Asset Management and Qube Research & Technologies, according to the Financial Conduct Authority.

Diversified Energy's share price has fallen dramatically from £12.85 on 31 July 2024 to £8.44 on 30 September. It has almost halved (down 47.2%) in the 12 month period ending 30 September 2024 and is languishing close to five-year lows.

Performance of Diversified Energy Company vs FTSE 100 over 5yrs

Source: FE Analytics

Diversified Energy specialises in the production, marketing, transportation and retirement of natural gas and is the largest owner of oil and gas wells in the US.

Last December, four Democratic members of the US House of Representatives Committee on Energy and Commerce wrote to the company requesting information about how it stops methane leaks from its mature gas wells.

The letter, addressed to chief executive officer Rusty Hutson Jr., stated: “Diversified Energy is responsible for remediating a substantial share of the country’s ageing oil and gas wells, but we are concerned that your company may be vastly underestimating well cleanup costs.”

A significant number of the company’s wells are low-producing, marginal wells, which are expensive and difficult to maintain, the letter noted. “Reports suggest that many of your company’s marginal wells may be leaking a substantial amount of methane.”

This enquiry caused Diversified Energy’s share price to tumble, prompting a public response from the company, stating that it had “dramatically reduced its reported Scope 1 emissions by more than 25% compared to 2020” and was deploying “emissions best-in-class detection equipment and protocols, which includes completing emissions detection surveys on all its natural gas wells”.

Diversified Energy also said it had achieved a gold rating from the Oil & Gas Methane Partnership and Project Canary, two independent emissions monitoring programs.

Furthermore, it has partnered with several states within the Appalachian region of the US to retire state-owned orphan wells “in a cost-efficient and environmentally sound manner”.

The gas company has been one of the UK’s most shorted stocks since February but the recent spate of bets may have been triggered by its interim results for the six month period to 30 June 2024, released on 15 August.

Diversified Energy’s net income of $16m fell dramatically compared to $631m for the first half of 2023. Total revenue of $369m decreased 24% versus $487m for the same period of last year, primarily due to a 16% decrease in the average realized sales price and a 12% slump in sold volumes.

Elsewhere, the list of the UK’s 10 most shorted stocks, below, remains similar to recent months.

Source: Financial Conduct Authority

Just outside of the above list, in eleventh place was Domino’s Pizza, following a disappointing set of results in early August. AJ Bell investment director Russ Mould said those results were “about as soggy as day-old pizza, guiding for full-year performance at the lower end of expectations after a slower-than-anticipated start to the first half”.

Domino’s has been passing on the benefits of lower food costs to its franchise partners: “presumably to help sustain a positive relationship given historic issues with franchisees”, said Mould.

“The company has tried to signal some confidence in the outlook with a £20m share buyback programme but the market appears unconvinced.”

It’s no secret small-caps across the globe have taken a pounding in recent years, as the rise in a narrow set of mega-caps – coupled with rising interest rates – have made them an unpalatable choice for investors.

The numbers reflect this harsh reality. Global equities have returned 23.6% to investors in the past three years, compared with 2.5% for the MSCI World Small Cap index.

The squeeze in appetite is apparent. Small-caps account for roughly two-thirds of all global companies (68%). That figure is significant when you consider that global smaller companies normally account for 7-8% of the global stock market valuation but recent underperformance has seen this fall closer to 4%, a 50-year valuation low.

But there are hopes the headwinds are gradually becoming tailwinds, with rate cuts and increased buybacks in the small-cap universe indicating an upswing is not far away.

We have seen a lot of discussion about the opportunities in the UK small-cap market, but another market being overlooked, despite huge valuation discrepancies, is Japan.

Like many other parts of the world, Japanese small-caps have faced a raft of challenges since 2021. The largest of these being the fall in the yen (it has been down as much as 30% versus the US dollar between June 2021 and 2024), which has been good for exporters such as large tech and artificial intelligence (AI) companies, electric vehicles, semiconductor-related businesses and renewables.

By contrast, high growth, small-cap companies have become almost untouchable for investors, despite many continuing to bring in strong sales and grow rapidly. A recent research update from Hennessy Funds says the market’s hesitance to value these stocks appropriately may stem from a prolonged period of economic stagnation, exacerbated by the impacts of the global pandemic on the Japanese economy.

Why now for unloved Japanese small-caps?

Since the start of 2023, Japanese equity markets have recorded strong returns, heavily driven by large-caps, many of which are exporters benefitting from the depreciation in the yen.

Janus Henderson portfolio manager Yunyoung Lee believes we have only seen the beginning of a resurgence in the region, citing moderate inflation driven by rising labour costs – a move which tends to improve valuations. He also pointed to changes in the macro-environment, such as the reorganization of global supply chains due to rising US-China trade tensions. There are already signs of domestic repatriation of manufacturing bases, particularly in the semiconductor and medical device sectors.

Given current market fundamentals and the growth in Japan's domestic economy, he said he would be surprised if small- and mid-caps did not grow as fast as large-caps.

There are signs of a turnaround; the yen has started to strengthen against the US dollar in recent months, albeit from low levels, traditionally a good sign for small-caps.

Baillie Gifford Shin Nippon trust manager Praveen Kumar also believes domestic retail investors – often a key indicator for wider appetite for Japanese stocks – are starting to take an interest in small-caps.

Why Japan versus other global markets?

In addition to attractive valuations, Kumar said small to medium-sized businesses are the ones facilitating change in the country – allowing them to tackle structural issues, such as software technology gaps, labour market demographic challenges and cyber security concerns. By contrast, the larger firms have global footprints and do not have as great a focus on these longer-term domestic challenges.

Then there is the research angle – compared to many of its global peers, Japanese small-caps are thoroughly under-researched. The Topix small-cap index has 1,649 companies with an average of three analysts covering each company, in contrast to the Russell 2000 (5.9) and the BBG DM Europe small-cap (8.4). It should be noted that companies with a market-cap of less than ¥200bn are seldom covered at all.

As a result, strong corporate results are often not reflected in price-to-sales figures, Kumar said, which was the case for online real estate company GA Technologies and food retailer Oisix. This creates opportunities for active managers to step in.

With supply chain issues being resolved and economic conditions improving, now might be the ideal time to tap into this sector of the market. It has been a challenging period, but rebounds tend to be hard and fast for small-caps.

Investors may want to consider a specialist Japanese small-cap vehicle such as Baillie Gifford Shin Nippon or the M&G Japan Smaller Companies fund. The latter is a bottom-up, valuation-sensitive fund that aims to provide a combination of strong capital growth and income by investing in mid and small-caps. 

For an all-cap Japanese strategy, the Comgest Growth Japan fund historically held 30% in small-caps but the current allocation is only 13% as a pragmatic response to the market’s preference for liquidity.

Those wanting exposure within a global offering might prefer the Global Smaller Companies Trust managed by Nish Patel, which currently has around 10% in Japanese small-caps.

Chris Salih is head of investment trust and multi-asset research at FundCalibre. The views expressed above should not be taken as investment advice.

China was the main place to be invested in September, according to monthly performance figures from FE Analytics, with Chinese funds and trusts making more than three times the next best peer group.

The country has been in the doldrums for much of the year, with the MSCI China index moving sideways from January to mid-September. But it rocketed higher over the past two weeks after fresh stimulus from the government propelled the market.

The People’s Bank of China (PBOC) freed up around 1trn yuan in long-term liquidity by reducing the reserve requirement ratio for banks by 0.5 percentage points, allowing them to lend more and support the economy. It also reduced interest rates by 0.2 percentage points and lowered existing mortgage rates by 50 basis points.

Ben Yearsley, director at Fairview Investing, added: “There is also the possibility of some helicopter money at some point and the PBOC will essentially lend to banks and brokers to invest in the stock market.”

These measures triggered the best week in nearly a decade at China’s stock exchanges towards the end of the month, propelling all assets invested in the region, as well as ancillary benefactors such as Europe, which relies heavily on exports to the country.

IA China/Greater China topped the best performing Investment Association (IA) sectors last month, up some 16.3%, while IT China/Greater China did even better, with the average trust in the Association of Investment Companies (AIC) peer group up 22.9%.

The top five IA sectors last month were dominated by the news, with IA Asia Pacific Excluding Japan in second with an average gain of 5.3% for its funds. It was followed by IA Global Emerging Markets, IA Asia Pacific Including Japan and IA Global EM Bonds Local Currency.

Source: FE Analytics

In the trust space, however, it was another asset class that caught the eye: property. Part of this could be because investors have finally agreed that inflation is now under control.

“Base rate cuts and a taming of inflation has led to investors rediscovering property as an asset class,” Yearsley noted.

In the UK, the consumer prices index (CPI) was flat in August at 2.2%, while in the US, one key measure of inflation fell from 2.9% to 2.5%.

Perhaps surprisingly, US funds and trusts failed to break into the top performers of the past month despite the Federal Reserve cutting rates for the first time in four years.

“The 0.5 percentage point cut was a bit of a surprise having only been trailed a week or two before. However, the US consumer continues to defy belief with retail sales increasing by 0.1% in August,” said Yearsley.

He suggested this could be because markets had previously priced in heavy rate cuts this year, before tempering their expectations. It is worth noting that the S&P 500 hit its 43rd record high of 2024 during the month.

Yearsley suggested, however, that the US rate cut may have been the key driver for the Chinese stimulus package. If true, this would make it indirectly responsible for the gains in Asia.

“China will occupy many column inches this month, but the Fed pivot was surely the catalyst. Without the slightly surprising 0.5 percentage point cut in September would Beijing have countenanced its multi-faceted approach? Will authorities there now wait for the next Fed cut, probably in November, before unleashing further measures?” he said.

Turning to individual funds, the roll call of top performers was dominated by China. It is the first time that the top 20 funds in the list below have all come from the same asset class.

Topping the table was Redwheel China Equity with an impressive 30.2% rise, while Matthews China was up 30.1%. These were the only two on the list to cross the 30% threshold, with the remaining 18 making gains of between 20% and 27.1%.

Source: FE Analytics

Among investment trusts, JPMorgan China Growth & Income, Fidelity China Special Situations and Baillie Gifford China Growth all made more than 20%, leading the way.

At the other end of the spectrum, it was a poor month for UK funds, with the IA UK Smaller Companies, IA UK All Companies and IA UK Equity Income sectors all among the worst performers in September.

Market commentators are expecting a tough autumn Budget from chancellor Rachel Reeves later this month, while the Bank of England was the only of the major three central banks to opt against cutting rates in September.

Additionally, the Office for National Statistics has revised down GDP, with the second quarter growth this year reduced by 10 basis points to 0.5%.

Yearsley said: “The pace of growth has faltered with [Keir] Starmer and Reeves being blamed for talking the UK down. Growth has now stalled for two months, and the third quarter could see no growth at all.

“UK flash PMI fell from 53.8 in August to 52.9 last month. At the same time, borrowing has overshot with debt to GDP now over 100% for the first time since the 1960s.”

IA Healthcare however took the top spot, with the average fund down 4.5%, while in the trust space, IT Latin America led the way lower, losing 5.2% on average.

In terms of individual funds, Liontrust Russia propped up the standings down 8.6%. “There didn’t seem any particular reason except the ongoing/never-ending war in Ukraine,” said Yearsley.

“The only real theme was UK micro-cap funds, especially those exposed to AIM. Rumours abound that the chancellor will remove the IHT break from AIM shares, which would be a devastating blow to the junior market and at complete odds with the Labour Party’s promise to be pro-growth.”

Energy funds also featured near the foot with the oil price falling near the $70 mark over the course of the month.

Global equities appeared to make little progress over the third quarter of 2024, data from FE fundinfo shows, although a closer look shows that plenty was going on just below the surface.

The MSCI AC World posted a slight gain over the past three months, after a V-shaped journey that saw the index slump on worries over the health of the global economy, lofty valuations among tech stocks and the unwinding of the yen carry trade.

Things then turned around with the publication of better economic data and the Federal Reserve making a 0.5 percentage point cut to interest rates. The recovery was then cemented when China launched an aggressive stimulus package, which  ranged from rate cuts to fiscal support.

Below, Trustnet looks in closer detail at how markets moved over 2024’s third quarter.

Performance of asset classes in Q3 2024

Source: FinXL

As noted above, global stocks performed mutedly, with the MSCI AC World making a total return of just 0.5% in sterling terms. This reflects a volatile quarter where concerns about a global slowdown and the unwinding of the yen carry trade weighed heavily on investor sentiment. However, the Fed’s rate cut and China’s stimulus in September helped stabilise markets towards the end of the quarter.

In comparison, global treasuries and cash in sterling performed better, delivering respective returns of 1.5% and 1.3% as investors sought safety in these assets amidst a mixed economic outlook. The anticipation of peak interest rates and concerns about economic stability led to a continued preference for lower-risk assets like government bonds and cash, while bonds were the beneficiaries of the Fed’s rate cut.

Commodities fared the worst, however, with a decline of 10.7% in the broad S&P GSCI index. Slowing growth in China put pressure on commodity prices during the quarter.

Performance of geographies in Q3 2024

Source: FinXL

Chinese equities – which have struggled for an extended period – were the standout performers of the quarter, with a 16.4% gain in the MSCI China index fuelled by the large-scale stimulus measures. These policy actions, aimed at spurring economic growth after a period of stagnation, sparked investor optimism, particularly in technology and consumer-driven sectors.

In contrast, the Nasdaq 100 fell by 4.3% as investors became increasingly wary of high valuations in US tech stocks and macro uncertainty. After several years of outperformance in technology and ‘new economy’ stocks, the market began to broaden out and shifted attention towards ‘old economy’ sectors in 2024’s third quarter, reflected in the modest rise in the Dow Jones.

Performance of investment factors in Q3 2024

Source: FinXL

High-dividend yield and low-volatility stocks led the market as investors sought stability amid global economic uncertainties. Income stocks were favoured with investors looking for strong dividends as bond yields fall alongside interest rates.

On the downside, quality, growth and momentum stocks underperformed. This shift reflects investor caution around high-growth areas after several years of outperformance.

Performance of industries in Q3 2024

Source: FinXL

Utilities led the stock sectors in the third quarter with a 9.7% return, thanks to investor interest in defensive sectors amid economic uncertainty. These companies also tend to pay reliable dividends, which are tied to the demand for income noted above.

At the other end of the spectrum, energy stocks struggled with a decline of 7.8% on the back of weaker demand and falling oil prices. Information technology also experienced losses, falling by 4.7% in the broader market rotation away from high-growth sectors.

Performance of commodities in Q3 2024

Source: FinXL

Although commodities in general fell over the quarter, cocoa prices rose 18.2% while coffee was up 15.7%, following supply shortages and increasing demand. Lean hogs also performed well and gold climbed 6.4%.

Conversely, energy prices declined sharply, with heating oil down 20.6%, gas oil falling 19.8% and WTI crude off 17.9%. These losses were driven by a combination of lower demand, particularly as economic growth slowed in key regions like China and Europe.

Performance of IA fund sectors in Q3 2024

Source: FinXL

When it comes to the Investment Association fund sectors, IA Property Other led the way with a 9.1% average return as falling interest rates made property investments more attractive.

The average IA China/Greater China fund gained 8.8% thanks to the stimulus package unveiled by Beijing. This represents a significant turnaround as Chinese equity funds were consistently at the bottom of the performance rankings because of slowing growth and recent regulatory crackdowns.

On the other hand, the IA Technology and Technology Innovations sector fell 4.4% over the quarter. This underperformance reflects broader market caution around high-valuation tech stocks, a recurring theme during the quarter as investors rotated into more defensive sectors.

A new investment vehicle by Ark Invest, the investment management firm founded by Cathie Wood, is now available on the eToro platform.

Called Ark Future First, it focuses on companies across technology, healthcare and sustainability, accessing them via seven of Ark’s exchange-traded funds (ETFs).

The largest allocations are to the Ark Artificial Intelligence and Robotics ETF (28.6%), followed by Ark Innovation (25.8%) and Rize Cybersecurity and Data Privacy (12.7%). These positions give investors access to “transformative growth opportunities” in artificial intelligence and blockchain.

There are three sustainability names: Rize Global Sustainable Infrastructure; Rize Environmental Impact; and Rize Sustainable Future of Food.

Finally, Ark Genomic Revolution targets the gene editing revolution, which is enabling “personalised medicine, early disease detection and more effective treatments”.

These three areas are poised for “transformative growth”, according to founder and chief executive officer of Ark Invest Cathie Wood.

Gil Shapira, chief investment officer at eToro, said through the Ark Future First portfolio investors can “seek growth through truly long-term, cross-sector trends that are predicted to not just shift markets but the world for decades to come”.

Growth funds have been outperforming their value peers so far in 2024 and two formerly popular options are on the rise once again.

Alexis Deladerriere, Nathan Lin and Jennifer Sullivan’s GS Global Millennials Equity Portfolio invests in companies that play into what younger generations enjoy, such as social media and the internet, with top holdings including Apple, Meta and Amazon.

WS Blue Whale Growth, meanwhile, is managed by FE fundinfo Alpha Manager Stephen Yiu and is a concentrated portfolio of 26 companies that he believes are “high-quality businesses”. Examples in its top 10 include Flutter, Nvidia and Visa.

Despite their different methods, they have had similar trajectories. Both have made top-quartile returns so far in 2024 and were above the average IA Global fund in 2023, but struggled in 2022, sitting in the fourth quartile with 31% and 27.6% losses respectively.

Performance of funds vs sector and benchmark over YTD

Source: FE Analytics

They have a correlation over the past six months of 0.99 (a score of 1 means they have moved identically) and 0.9 over the past year. This widens slightly over longer periods to 0.83 and 0.84 over three and five years, although both have a correlation of 0.9 to the MSCI All Countries World index over the past half a decade.

The funds have around £1bn in assets under management and more than 50% of their portfolios in their top 10 positions, but for Tom Sparke, portfolio manager at Progeny Asset Management, Blue Whale could provide greater diversification.

While both have delivered “very good returns for their long-term supporters” and are “true to their remits”, containing “exactly the kind of stocks that one might expect to see”, he noted that the Global Millennials fund encompasses more of the most familiar mega-cap names in typical US and global funds so overall.

“Looking at these top holdings, the Global Millennials fund encompasses many more of the most familiar mega-cap names in typical US and global funds so overall, if you are looking to diversify your holdings, then Blue Whale would provide greater diversification,” he said.

Ben Yearsley, director at Fairview Investing, agreed that Blue Whale was the preferred choice, noting he generally likes boutiques over the large fund management groups.

“Purity of process and clarity of decision making makes boutiques compelling in my mind,” he said. In the case of Blue Whale, it has one product that has delivered “decent results” over its life and the team are focused solely on this.

While 2022 was “tough” as the high-growth stocks that had boomed during the era of low interest rates tumbled, Yearsley said Yiu “took that  as an opportunity to re-look at the process to see if it was fit for purpose”.

“Largely it was, he concluded, but he made some tweaks that meant going forward he wasn’t so reliant on the uber-high growth stocks. I like this kind of honest appraisal.”

Not all agreed, however. Jason Hollands, managing director of Bestinvest, said Blue Whale can be more opaque than its peers. For example, although it lists the top 10 holdings in its monthly factsheets, it omits the position sizing.

“This isn’t helpful,” said Hollands. However, investors can see that 45% of the concentrated 26 stock portfolio is in technology positions and a further 7.8% in communication services, which “probably explains the strong performance over the past couple of years”. 

The Goldman Sachs fund also has big positions in tech (26%) and communication services (26%), but another notable theme is 24% in consumer discretionary stocks.

Its top 10 includes big positions in a number of the artificial intelligence (AI) related darlings, including Nvidia, TSMC, Meta, Alphabet, Amazon and Apple and is a slightly more globally diversified with 61% in the US, versus Blue Whale Growth which is 75% invested in US stocks.

“Personally, I wouldn’t buy funds with heavy positioning in tech and AI names given currently frothy valuations, but If I had to invest in one of these two I would have a marginal preference for the Goldman Sachs product given better disclosure and slightly more diversification,” he said.

However, he recommended investors interested in these funds look at Brown Advisory Global Leaders, a 30-40 stock portfolio of mostly large-cap companies.

“Its investment philosophy is focused on high-quality, cash-generating businesses delivering positive and sustainable returns on capital and holding them for the long term. Diversification across sectors and geographies is important, with the portfolio typically having 40% outside of the US. Currently US exposure is 43%,” said Hollands.

It sits in the second quartile of the IA Global sector so far this year but its drawdowns in 2022 were far less severe.

Performance of funds vs sector and benchmark over 5yrs

Source: FE Analytics

It is a better performer than both over three years although lags the Blue Whale fund over five years, as the above chart shows.

Investment trusts are charging unfair fees, according to Hawksmoor Investment Management’s Ben Conway.

Most fund managers and investment advisers base their fees on the net asset value of investment trusts’ underlying portfolios, but for trusts holding hard-to-value private assets, those valuations are subjective and can fluctuate wildly, he argued.

Conway, who is Hawksmoor’s chief investment officer, thinks it would be fairer for all investment advisers to charge fees based on a trust’s market capitalisation to align their interests with shareholders.

“Calculating fees as a percentage of a valuation figure that is so clearly subjective is simply a nonsense and creates horrific alignment issues for shareholders,” he stated.

Investment trust fees have been a hot topic of late, following their recent exemption from European Union cost disclosure rules. Conway’s argument concerns an unrelated point, however – whether charges themselves are fair, not how they are disclosed.

To illustrate his point he described two investment trusts whose portfolios have been written down recently – Gresham House Energy Storage and Digital 9 Infrastructure – causing shareholders to wonder whether the investment managers have been charging fees based on inflated valuations.

Gresham House Energy Storage (GRID) announced a material write-down to its NAV on 9 September after replacing one of the two third-party consultants it uses to calculate its NAV. The new firm used lower revenue forecasts for the trust’s batteries than the previous consultant.

“The fact that GRID switched from one provider to another – both doing the same job, looking at the same information and yet coming up with different forecasts – shows how subjective this analysis of revenue forecasts is,” Conway said.

“In GRID’s case, the natural question for shareholders to ask is: have they been overcharged during the period when a more aggressive provider of revenue assumptions was used?”

The board of Digital 9 Infrastructure, meanwhile, announced a provisional NAV of 45p per share on 6 September – a 43.2% reduction from the December 2023 NAV.

The trust’s assets rely on future capital investment to fund their expansion, making them hard to value. “Fees on an NAV that is subject to such a huge and sudden revaluation is just not acceptable,” Conway argued.

“For any asset where there is scope for subjectivity or sudden revision due to external factors, fees must be levied on market cap,” he continued. Otherwise, “the scope for misalignment between the investment adviser and the shareholder is too great”.

Furthermore, with many trusts trading at wide discounts to their net asset values, the returns experienced by shareholders are intrinsically linked to the trusts’ market capitalisations and share price – but bear a more distant relationship to the underlying portfolio’s NAV.

Three-quarters of investment trusts base their fees on NAV. This is a bigger problem for trusts invested in alternative assets given that their NAVs are calculated less frequently and subject to greater mark-to-market revisions. Nonetheless, Hawksmoor would like to see all trusts switching to fees calculated on market cap, even equity-oriented trusts whose portfolios are easy to value, to ensure alignment with shareholders.

Currently, 8% of investment companies (excluding venture capital trusts) charge on a market cap basis, according to the Association of Investment Companies (AIC). 

Bellevue Healthcare (BBH) is one example, said William Heathcoat Amory, managing partner at Kepler Partners. "We like this feature, as it incentivises the manager to see the shares trade close to NAV and aligns their interests more with those of shareholders. BBH’s fee of 0.95% is also lower than the 1.25% weighted average for the AIC Biotechnology & Healthcare sector and there is no performance fee," he said.

James Carthew, head of investment companies at QuotedData, has a different perspective. "Our stance has always been that the best fees are based on the lower of market cap and net asset value," he said. Just 4% of investment trusts do this currently, according to the AIC.

Meanwhile, WhiteOak Capital Management, which manages Ashoka India Equity and Ashoka WhiteOak Emerging Markets, has pioneered another approach. It does not charge a fixed management fee at all but instead levies a performance fee on a three-year cumulative alpha basis.

Founder Prashant Khemka said: “We only get paid if we outperform. The alignment of interest is strong because we can't just sit on our laurels and expect to get paid.”

Reading some fund sales literature, you might think that it is possible to invest successfully in emerging markets only by being some sort of Indiana Jones character.

I like to imagine myself racing from country to country in my Artemis biplane, covered in dust and bruises from various adventures in a relentless search for companies no-one has heard about before.

Relentless, yes, but – for me at least – also pointless. I have not been on a foreign jaunt in years.

When I started my career at Fidelity, back in 2002, the legendary Anthony Bolton would say that going to meet companies gave you an edge. The analysts might all be forecasting earnings growth rates of 10% a year, but conversations on the ground could tell you a different story.

I recall an ex-colleague who covered Sub-Saharan Africa. He would go to Ghana and be met at the airport by a motorcyclist who would take him to see businesses so he could get company data disclosure directly. But data availability has really improved for more liquid emerging markets.

Our investable universe has doubled in the past decade. There are now around 3,000 companies around which there is sufficient and reliable data on which to make an investment decision. The asset class has matured. There are more big companies; they have a longer track record, and they have better data availability.

With so much information available online are we saying that somehow visiting a factory in the middle of nowhere would allow me to intuit extra vital insights? Ask my wife – intuition is not one of my strengths! Moreover, I am not sure that I could judge who has these ‘soft’ skills. So it would be no good giving me a global team of analysts to manage and telling them to do the legwork, because that would require me to make similar judgement calls on them – such as ‘that analyst is always very cautious’ or ‘that one can get a bit too enthusiastic’.

Some people will say that being on the ground enables you to see the facilities and reduces the chance of fraud. Most experienced fund managers have found at some point one of their holdings touched by fraud. It is hard to spot. If the perpetrators were so blatantly crooked that you could tell by meeting them or visiting their premises, I would hazard a guess that in the larger-cap arena in which we operate, everyone would soon know what they were up to. With the history of markets showing that many companies do not survive the test of time, we like to diversify our exposure across companies, geographies and sectors. This mitigates risk.

Another common argument for investing in a fund with teams on the ground is that they have a better sense of perspective. I understand this. Even despite the recent stimulus announcements, many looking at China through the prism of the UK and developed markets media see a property sector in turmoil, a failing economy and government curbs that restrict enterprise and growth.

While there are some truths in those observations, the reality is that China is undergoing change. It is becoming more self-sufficient. Many of the changes should have longer-term benefits for the country. The domestic recovery is taking time, but company valuations look attractive. China has seen huge innovation in technology, artificial intelligence (AI) and manufacturing. The government has not suppressed enterprise in these areas.

We have nearly 30% of our fund in China – a significant overweight position that puts us in a good place to benefit from stimulus. But I did not need to travel to China to make this judgement.

I took this position by gleaning insights from a rigorous analysis of data. If anything, there is too much information. We use a proprietary system to sift through data from a range of sources, to make analysis more manageable. The building blocks are company fundamentals, behavioural insights and market trends. By comparing the characteristics of one company with the rest of the universe, we are able to identify a shortlist of companies with good growth and quality features and attractive valuations that merit closer inspection. It helps ensure we are empowered by information, not overpowered.

And AI is helping even more. Today, managers like us can use a news service from a data provider that takes articles from over 100,000 international news sources, translates them and feeds them into an ever-improving language-processing algorithm to tell us whether the coverage around any company is positive or negative. It all adds to our knowledge. And it is fast – if a company has a data leakage you know about it the next day. It gives you a more objective way of assessing the more granular characteristics of a business beyond company disclosures.

This home-comforts approach is not the only one. I am sure other managers – particularly those with a small-cap bias – will raise objections and say meetings still matter. I acknowledge that.

But this model works for me. It helps us overcome behavioural biases that can develop from tracking companies for long periods of time. It frees us from the emotional attachments to a business that might emerge from visiting. And it focuses our minds on the financial characteristics that really matter.

Moreover, our investment process is designed to deal with a range of market conditions, with diversification at the heart of our risk management approach. Ultimately, I believe this should all feed into performance.

Raheel Altaf is manager of the Artemis SmartGARP Global Emerging Markets Equity fund. The views expressed above should not be taken as investment advice.  

China has been struggling to meet investors’ expectations in the post-Covid world, but just when people started wondering whether it was high time for a rebound, the CSI300 index (which tracks the performance of the top 300 stocks on the Shanghai and Shenzhen stock exchanges) shot up by 15.7% last week, taking some by surprise.

The catalyst for this sudden upswing came from the People’s Bank of China, which freed up about ¥1tn in long-term liquidity by reducing the reserve requirement ratio for banks by 0.5 percentage points, allowing them to lend more and support the economy.

It also cut the seven-day reverse repo rate (a tool used to manage liquidity and control short-term interest rates in the banking system) from 1.7% to 1.5%.

Performance of indices over 1 month

Source: FE Analytics

These measures triggered the best week in nearly a decade at China’s stock exchanges, as well as an upswing in European equities given the region’s trade links with China. But one good week doesn’t mean China is out of the woods. Below, Trustnet asked experts what investors should make of China’s stimulus package and how long the rally can continue.

Franklin Templeton’s Ness: Some of our best performers are Chinese companies

China used to be one of the largest underweights in the Templeton Emerging Markets Investment Trust portfolio, but manager Andrew Ness has gradually closed that underweight over the past three to four years. When last week’s moves began, the trust’s Chinese exposure was close to matching the 24.4% allocation of its benchmark, the MSCI Emerging Markets index.

“People talk about this China rally as if it has just happened, but if we look year-to-date, a significant number of our largest performers in the portfolio were Chinese names.”

They included internet and technology company Tencent, which was up 63% year-to-date, white goods manufacturer Haier Smart Home (+68%) and Brilliance China, the BMW joint venture partner.

Despite being “not without a challenge”, China remains an “investible” market, with plenty of strong points, including its “highly educated work force, world-class infrastructure and significant advantages in manufacturing, renewable energy and elective vehicles”.

The manager also argued that China could be considered as “politically stable, unlike much of the rest of the world”.

Whether the rally continues  will depend on domestic consumption and investment, Ness said.

“Last week’s stimulus is going to be impactful in the short term, but the long-term sustainability of this rally is dependent upon the real economy impact and a pickup in domestic confidence from both a consumption and investment perspective,” he explained.

“The government finally recognizes that it needs to stimulate both those areas now, but will the combination of the monetary policy changes be sufficient for that? We are not sure. It is just too soon to say.”

Dennehy Wealth’s Richardson: We feel positive about China over the long-term

Joe Richardson, a discretionary investment manager at Dennehy Wealth, sold out of China a couple of months ago and decided to await “a more stable footing before considering re-entry”. He previously had direct exposure to Chinese stocks but used a stop-loss.

To him, the country is in a “painful but necessary” transition period and still facing “significant headwinds”, including an aging population and US sanctions.

“There is only so much technology you can copy, at some point China needed to innovate internally, shifting from producing low-tech goods like furniture and textiles to much more advanced sectors, such as semiconductors and broadcasting equipment,” he said.

“While still far behind Taiwan, it is making strides in key areas like electric batteries and artificial intelligence (AI).”

Almost 68% of top-quality electric battery papers cite Chinese research, compared to just 10% for the US. Similarly, in AI, 31% of top papers reference Chinese work, while the US accounts for 14%.

“They are really pushing technological breakthroughs so their limited labour force with high skills and capital can still flourish – that’s their number one priority,” he said. “We feel positive about China over the long-term.”

AJ Bell’s Mould: Chinese stimulus measures have a patchy success rate

Among the sceptics was AJ Bell investment director Russ Mould, who thinks the rally implies a level of investors’ FOMO (fear of missing out) but warned that in the past, stimulus measures have not lived up to investors’ expectations.  

“A veritable feast of economic stimulus measures has led investors to take a more optimistic view of the earnings potential for Chinese companies,” he said.

Lower borrowing costs, smaller deposits for buying homes and more capacity for banks to lend money should lay the foundations for “greater economic activity” among businesses and consumers.

“On paper, it looks interesting. But whether the desired results end up meeting investors’ expectations is another thing,” he continued.

“China is notorious for throwing stimulus measures left, right and centre, and the success rate is patchy to say the least.”

Investment demands an element of risk-taking to generate returns but highly volatile funds are more likely to experience wide fluctuations in performance. While cautious savers often avoid volatile funds, for investors comfortable with taking higher risks, the pay-off of greater returns can be worth the bumpy ride.

Several global equity funds have successfully toed the line between high risks and high rewards. Below, we look at the funds in the bottom decile for volatility over the past five years that have enjoyed top-decile performance within the IA Global Sector.

This was a turbulent period for global equities, with the impact of the pandemic and high interest rates leading to challenging years for many of the funds below.

Returns and volatility of IA Global funds over 5yrs

Source: FE Analytics; data in sterling terms to 31 Aug 2024

First up is the £739.6m PGIM Jennison Global Equal Opportunities fund, managed by Mark Baribeau and Thomas Davis. 

Performance of fund vs sector and benchmark over 5yrs

Source: FE Analytics

With volatility of 20.9%, the portfolio is one of the riskiest funds in the IA Global peer group, with one of the widest tracking errors in its sector at 14.7%.

This comparatively aggressive strategy saw one of the worst maximum drawdowns of -39.9% over the past five years. Yet the fund recouped its losses and achieved top-decile performance over the past five years, up by 98.3%.

As a result, its 0.53% Sharpe ratio ranks in the top quartile for risk-adjusted returns. Its other metrics have also been respectable with the portfolio enjoying alpha of 2.3 above the MSCI All Country World Index over the past five years. This makes the fund top-decile for alpha generation in the IA global sector.

This means that while the fund has doubtlessly been high risk, its investors have been amply compensated for the volatility.

Second, we have the £1.8bn Baillie Gifford Positive Change fund. Led by Kate Fox and Lian Qian since 2017, the fund has returned 84.2% over five years, with a total volatility of 21.8%.

Performance of fund vs sector and benchmark over 5yrs

Source: FE Analytics

These results were down to consistently strong performance between 2018 and 2020. The fund has struggled more recently, however. Its top-quartile five-year performance was followed by a drop to the fourth quartile over three years and the past year. 

The fund has maintained a strong reputation and is recommended by Square Mile, who have given it a Responsible A ranking on their Academy of Funds.

“We believe this fund is currently one of the most attractive responsible fund offerings in the market. Baillie Gifford has clearly put a lot of thought, effort and resources into this product,” analysts at Square Mile commented.

“It has a well-defined and distinctive investment process and places a strong emphasis on both returns and providing a positive impact over the long run.”

Finally, the £1.8bn Baillie Gifford Long-Term Global Growth Investment fund is one of the 10 riskiest funds in the sector, with 24.1% volatility.

Nevertheless, FE fundinfo Alpha Managers Mark Urquhart and John MacDougall, who helm the fund, have achieved top-decile performance, returning 84.2% over five years.

Moreover, the portfolio has enjoyed strong excess returns, generating alpha of 2.6 above the MSCI ACWI. This puts the fund within the top quartile for alpha generation in this period.

Performance of fund vs sector and benchmark over 5yrs

Source: FE Analytics

Over the past five years, the fund has experienced one of the widest tracking errors in the peer group, at 21.4%, a bottom-quartile ranking. It also experienced one of the largest maximum drawdowns compared to its peers at -49.4%, the sixth largest in its sector.

Finally, three sector-specific exchanged-traded funds (ETFs) in the IA Global peer group gave their investors a white-knuckle ride that was ultimately rewarding. The most notable of these was the £389m L&G Battery Value-Chain UCITS ETF, which was the only fund that matched our criteria and enjoyed returns of over 100%.

Other examples include the £514.3m L&G Artificial Intelligence UCITS ETF, as well as the £405.3m Invesco CoinShares Global Blockchain UCITS ETF which ranked amongst the most volatile funds in the IA Global sector but delivered top-decile performance.  

A well-diversified portfolio isn’t born overnight. Not only does it take effort, it also takes money – it’s no use finding a long list of great fund combinations if your investible pot is limited.

When time and money are scarce, investors must work with what they have got. One option would be to invest in a one-stop-shop solution, be it a multi-manager, multi-asset or index fund – but it doesn’t have to stop there.

Trustnet asked experts what other options are available for investors who want to go beyond one-stop-shop funds, but keep things simple. Below, they suggested two-fund portfolios with a core/satellite approach, whereby one fund bears the brunt of the heavy lifting while the second one complements and enhances it.

Fidelity Index World and Templeton Emerging Markets

Long-term, buy-and-hold investors might want to focus on equities rather than a multi-asset approach.

For them, a good pairing would be a core holding in a global developed market equities fund, coupled with a modest satellite position in emerging markets, according to Jason Hollands, managing director of Bestinvest.

His suggestion for global developed market equities is the Fidelity Index World fund, which tracks the MSCI World Index and has a low ongoing charges figure (OCF) of 0.12%. It provides “significant diversification across stocks at low cost,” he said.

For the satellite position in “less efficient” emerging markets, he proposed a selective approach through an actively managed portfolio such as the Templeton Emerging Markets investment trust.

Performance of fund against sector and index over 10yrs
Source: FE Analytics

This trust is “the grandaddy of emerging market investments”, having been launched in 1989. Since the departure of veteran investor Mark Mobius, it has been managed by Chetan Seghal and Andrew Ness, who “leverage a research team that is embedded across local markets”.

“The trust benefits from having a very pragmatic and patient philosophy, investing in companies with sustainable earnings power that are mispriced,” Hollands said.

Currently, nearly 81% of the portfolio is invested in Asia, with technology and financials being notable themes.

Polar Global Insurance and Troy Trojan

Director of Fairview Investing Ben Yearsley picked the satellite fund first – Polar Global Insurance.

“The satellite is easy. It’s one of my favourite funds, albeit a niche one; I use it for low and high risk,” he said.

“You’d be hard-pressed to find any of its stocks in most other portfolios, as it mainly focuses on reinsurance and catastrophe insurance companies.”

The £2.4bn strategy has achieved a maximum FE fundinfo Crown Rating of five and has been “very consistent over the long term”, having delivered 10% per annum over a very long period.

Performance of fund against sector and index over 10yrs

Source: FE Analytics

For core exposure in a small portfolio, he wanted to avoid excessive volatility, so he also went with Fidelity Index World. It offers “cheap, broad-based coverage” and is suitable for higher-risk investors.

Those who would rather keep risks at a minimum might prefer Troy Trojan, managed by FE fundinfo Alpha Manager Sebastian Lyon and Charlotte Yonge. It seeks to protect wealth from inflation through exposure to quality companies, gold and inflation-linked government bonds.

JOHCM Global Opportunities and BlackRock Global Unconstrained Equity

Finally, Rob Morgan, chief analyst at Charles Stanley Direct, opted for two global equity funds – JOHCM Global Opportunities for the core allocation and BlackRock Global Unconstrained Equity as the satellite.

Performance of portfolios (with 70% in core and 30% in satellite) against IA Global sector over 3yrs

Source: FE Analytics

The JOHCM fund can be considered for “part of an investor’s core allocation to global shares, especially for those wishing to keep their portfolio anchored by characteristics of quality and value”, he explained.

The fund is neither growth or value biased, instead exploring what the managers refer to as the ‘forgotten middle’ where quality, growth and value styles intersect.

“As well as a concentrated portfolio, where stock picking has a significant impact, the approach emphasises capital preservation,” Morgan said.

“If insufficient attractive opportunities are identified, the managers are prepared to hold some cash.”

This all-weather fund is paired with BlackRock Global Unconstrained Equity, a “punchy, growth-orientated option” that is likely to be “more volatile, given the very high-conviction approach”.

It is managed by Alistair Hibbert, best-known for his success in unconstrained European equity funds. The manager searches for the “growth compounders” of the coming decade and beyond, with no regard for any benchmark.

“This is a pure stock-picking fund with a very defined approach and style in the hands of an accomplished manager,” said Morgan.

“It makes for a good complement to a broader equities fund or a tracker.”

Source: FE Analytics

The Janus Henderson Absolute Return fund has gone 23 consecutive months with no drawdowns, the longest unbroken streak since its inception in April 2009.

Manager Luke Newman said his colleagues have promised him a birthday cake once he gets to two years. The £912m fund’s stellar returns also earned Newman and co-manager Ben Wallace an FE fundinfo Alpha Manager of the Year award in the absolute return category in May.

Newman attributes the fund’s success to a conducive environment for stock-picking on both the long and short side. Below, he explains why the fund is net short the US and how he is using pairs trades to benefit from the rising popularity of obesity drugs.

Describe your investment strategy

We are an equity long/short strategy within the absolute return sector, investing in developed market, large- and mega-cap equities. Over the long term, we've delivered equity-like performance with the volatility of sovereign fixed income. That's become the calling card of the strategy.

We run two separate investment books: a core book, which looks longer term on both the long and the short side; and then a tactical book, which is more trading-orientated and can react quickly to protect against downside risk and capitalise on shorter-term disruptions.

How has Janus Henderson Absolute Return performed recently?

We've delivered a run of 23 months without a drawdown. It's a new record for us and we've been running the strategy for 20 years.

Performance of fund vs sector and benchmark over 2yrs

Source: FE Analytics

The big change during this time has been moving back to an environment where money has a cost. We've emerged from a period of near zero interest rates into an environment that feels more normal for equity investing.

The increase in dispersion between share prices is being driven by underlying company fundamentals more than macro headlines. That rationality is great news for stock-pickers, especially those able to benefit on the short side.

How much of your performance came from the short book this summer?

In down months for the broader market, we would expect more returns from the short book and that's exactly what happened through the summer, especially given we were positioned net short US companies.

But areas of the long book were still contributing. Earlier this year, we tilted the portfolio towards defensive, longer duration assets, particularly in Europe and the UK. Sectors such as utilities and real estate investment trusts (REITs) came into the portfolio and performed well this summer.

How long have you been net short US stocks?

Through the quantitative easing (QE) years, we were consistently net long the US. A lot of liquidity was injected into the US economy, which outperformed.

But that is unwinding. The levels of financial leverage at a household and corporate level, plus the much higher relative valuations of US assets, convinced us to take profits through the summer of 2022 and introduce some net shorts. We didn’t feel comfortable with the lofty valuations within the technology, consumer and industrial sectors. Our focus was on the US consumer, going short companies in retail, housing and consumer goods.

How have you been playing the tech sector?

In 2022, technology in the US was the first area we moved to short. That was due to valuation regime change with higher interest rates, as well as the normalisation of trading patterns after lockdowns when we were all sat at home replacing hardware and signing up to new subscriptions. There was a pronounced sell-off and we were able to protect capital through our short positions.

Since 2023 there has been much more stock-specific dispersion within technology. Businesses such as Microsoft, Oracle and Alphabet have been able to adapt to a higher cost of borrowing. In many cases, they have huge net cash positions, so high rates are actually a positive.

The contrast would be in the short book, where you have businesses such as electric vehicle manufacturers that have seen challenges in terms of demand, pricing, leverage and the higher cost of debt.

Do you have any exposure to obesity drugs?

We’ve been close to Novo Nordisk during the 20 years we’ve been running the strategy. We're always interested in companies whose challenges are on the supply side rather than generating demand; that is usually an advantageous position to be in.

The second and third derivatives of obesity drugs are interesting when you think about the lifestyle changes we are likely to see as adoption increases. We are shorting quick service restaurants in the US.

We're long Coca-Cola, which has no snacking exposure, and short a beverage and snack competitor; that’s a pairs trade which has worked well.

How do you use pairs trades?

During the QE years of low interest rates and high correlations, pair trading strategies were really challenged. You simply didn't have the dispersion at a single stock level to make them worthwhile.

Over the past two years, pairs trading – going long and short two different companies in the same region or industry to isolate macro risks – has become an important part of our strategy again.

An example would be long InterContinental Hotels versus shorts in US hotel groups. InterContinental Hotels was trading at a material discount at the start of this year because it is London listed and has more Chinese exposure than US competitors. We benefitted from the normalisation of the relationship between those valuations.

Performance of Intercontinental Hotels this year vs FTSE 100

Source: FE Analytics

What has been your best performing position recently?

Rolls-Royce, the aircraft engine manufacturer. We met the new management team early last year and understood the opportunity. The share price was implying that the business would need to raise equity, whereas it became clear to us that Rolls-Royce – with a dynamic new management team – would be in a strong position to recover from travel disruption and resume dividends.

Performance of Rolls-Royce vs FTSE 100 over 2yrs

Source: FE Analytics

What positions detracted from returns in the past year?

We haven't had a significant detractor over that period because of the low level of risk in the strategy. We usually have a long list of very small detractors because we operate with a stop loss in the tactical book. We stay in liquid positions and if the fundamentals change or a share price’s reaction to an announcement differs from our expectations, we close that position. Similarly, if any position moves 10% against us, we close it.

What do you enjoy doing outside investing?

I ran the Marathon du Médoc last year, which is a perfect way of combining two passions – running and wine.

Everything from my youth seems to be making a comeback: Oasis, the Spice Girls, Sex and the City, Top Gun, a Labour landslide, inflation and pre-financial crisis economic conditions. Fund managers, who are getting bored of reading central bank tea leaves, are yearning for the latter.

Luke Newman, who manages the Janus Henderson Absolute Return fund, said the biggest change in equity investing during the past two years has been “moving back to an environment where money now has a cost”.

“In terms of financing rates, the discount rate, interest rates, the cost of money, they're much more normal in a historical context” than during the post-financial crisis years of quantitative easing, he said. As a result, dispersion between share prices is increasing and is being driven by company fundamentals, more so than macro headlines. This is “great news for stock pickers”, he concluded.

If we are returning to a landscape more akin to the pre-2008 normality, surely it would be wise to entrust our savings to fund managers who have a track record from that era.

In some ways I am preaching to the choir. Most fund selectors look for experienced managers. But I want to make the specific point that some of that investment experience should have been garnered before the global financial crisis irrevocably altered our industry and ushered in a wave of central bank intervention.

I began my career in financial journalism back in 2002, interviewing UK pension funds back when they all still had a massive home bias. Then I moved to New York where I had a ringside seat to watch the financial crisis unfolding… but did I read the writing on the wall? Let’s just say that if you’ve watched The Big Short, you will have noticed that a plucky young English journalist was, well, nowhere to be seen. This still rankles. “Why didn’t you spot the financial crisis coming?” my father asked me over lunch last week. If I had, the lunch would’ve been a lot more lavish.

Which leads me to believe that we’re looking for fund managers who racked up much more pre-financial crisis experience than I did; in other words, somebody older than me. Late forties and above. When I interview fund managers in this age group, I do tend to afford them a greater degree of respect. And we tend to get each other’s jokes.

There are downsides to old hats, however. The longer you do something, the more patterns, prejudices and bias can set in.

To guard against this very thing, Mick Dillon and Bertie Thomson from Brown Advisory invite their colleagues to point out their blind spots at their offsite meetings every year. Mick admitted to a tendency to cleave to stereotypes that were valid in the past but are no longer true, such as semiconductors being a cyclical industry.

In the same vein, GQG Partners set out to hire a cohort of younger analysts who did not share the same prejudices as the rest of the team, whose fingers had previously been burned in the energy sector, for instance.

Most people now subscribe to the benefits of a diverse team but age is a facet of diversity that may not have been afforded the appreciation it deserves, and investment teams arguably need people of all ages to reach the best decisions.

So next time you have a big birthday, celebrate in style. Ageing is a privilege and it may just make you better at your job.

The past three years have seen a reversal of fortunes for fixed income funds. Central banks’ decisions to slash interest rates this year bode well for the asset class, as lower interest rates should enable bonds to deliver higher total returns.

Several fixed-income strategies have proven impressive amidst these turbulent market circumstances, with some even recovering from weak long-term performance to produce stellar numbers more recently.

As part of an ongoing series, Trustnet looks at the funds that have rallied from bottom-quartile performance over 10 years to top-quartile performance over three.

Below, we look at fixed-income funds across the IA Sterling Corporate Bond and IA Sterling Strategic Bond sectors.

How bottom quartile funds over 10yrs have performed recently

Source: FE Analytics

In the IA Sterling Strategic Bond sector, just two funds meet our criteria of moving from bottom to top-quartile performance over the past three years.

Of those two, the most interesting is the £813m M&G UK Inflation Linked Corporate Bond fund, managed by Ben Lord and Matthew Russell.

The portfolio has an FE fundinfo Crown Rating of five. It has rallied from the bottom 10 funds in its sector, returning 24.4% over 10 years, to a top-five performance of 10.6% over three years. Additionally, the fund delivered a top-quartile effort over the past five years, rising by 15.8% in total.

Performance of fund vs sector and benchmark over 3yrs

Source: FE Analytics

Unlike more conventional corporate bond funds, this strategy came into its own when inflation spiked in 2022. Given its low sensitivity to movements in interest rates, it was not hampered by rate hikes that year. Therefore, the fund boasted a particularly strong 2022 compared to peers, falling by just 0.4% that year.

The fund invests directly in high-quality, inflation-linked corporate bonds, as well as gaining indirect exposure by combining inflation-linked government bonds with derivatives. It also holds floating rate notes.

Analysts at Square Mile, who have given the fund an AA rating, said “there are very few funds of this ilk” giving investors “rare access” to inflation-linked corporate bonds.

“We believe that the fund is both intelligently structured and capably managed to navigate inflation, credit and interest rate markets to the benefit of investors seeking inflation-protected returns over three to five-year time horizons,” they concluded.

The fund’s shorter-term record has failed to impress, however, dropping to the bottom quartile versus peers over the past year.

Another example of a strategic bond fund which rallied over three years was the four Crown-rated £67.1m Schroder Sustainable Bond strategy.  

It was the second-worst performer in the whole sector over 10 years, but it produced a top-quartile effort over three years, up 8%, and remained in the top-quartile for the past year.

Performance of fund vs sector over 3yrs

Source: FE Analytics

Turning to the IA Sterling Corporate bond sector, a further four funds match our criteria here.

First is the £895m AXA Sterling Credit Short Duration bond, led by FE fundinfo Alpha Manager Nicolas Trindade.

The portfolio has enjoyed an impressive turnaround, rising from the seventh-worst track record in the peer group over 10 years, to the third-best result of 6.6% over three years. Its five-year performance is also impressive, with the fund up by 10.1%, making it the fourth-best in the sector.

Performance of fund vs sector and benchmark over 5yrs

Source: FE Analytics

The fund's defensive strategy has enabled it to weather difficult market circumstances and recover much better than competitors in the corporate bond peer group.

It held up well in 2021 and 2022, falling by just 0.1% and 4.2%, respectively. Both years were challenging for other bond funds, with no fixed-income portfolio in the peer group enjoying positive returns in 2022, while just 10 funds rose in value in 2021.

Square Mile analysts gave the fund an AA rating, noting that while its focus on short-dated bonds means returns are lower, the portfolio successfully protects capital in line with its stated objectives.

“Whilst this fund is never likely to excite, it is also unlikely to produce any nasty surprises for investors,” analysts at Square Mile concluded.

Several other funds in the Sterling Corporate bond sector rebounded from struggling long-term performance and enjoyed first-quartile three-year returns. These included the £1.3bn Vanguard UK Short-term Investment Grade Bond Index, the £177.6m Allspring (Lux) Worldwide - EUR Short Duration Credit fund, and the £87.4m CT Sterling Short-dated Corporate Bond fund.