Only one fund in the bottom quartile of the IA UK Equity Income sector over the long run has managed to make a top-quartile return in the past three years, according to data from FE Analytics: HSBC Income.

Co-managed by Paul Denham and Ed Gurung since 2021 and 2023 respectively, the fund has blossomed under their leadership, returning 30.4% in the past three years.

However, it has not been enough to arrest the fund’s disappointing long-term performance, as it remains in the bottom quartile of the sector over 10 years. In fact, the fund failed to make above-average returns in every calendar year from 2014 to 2022.

Since then, performance has turned around thanks to the strong gains from top holdings Shell (9.1% of the portfolio) and BP (5.8%), which have blossomed as the oil price rose on the back of global supply chain issues and sanctions on Russian exports following its invasion of Ukraine.

It also has large positions in parent banking giant HSBC alongside Barclays and NatWest, which have all done well in the era of rising interest rates.

The £113m fund, which was launched in 2013, has been given an FE fundinfo Crown Rating of four for its recent three-year performance. Impressively, the fund has achieved its recent gains with first-quartile volatility over the period of 10.59%, as well as one of the lowest maximum drawdowns (9%) – the most an investor could have lost if buying and selling at the worst possible times.

Source: FE Analytics

In this series, Trustnet looks at the funds that have been in the bottom 25% of their peer group for performance over 10 years but have risen to the top quartile over the past three years.

In the IA UK Equity Income sector, investors have to open the scope of the research to come up with more than one name. If widening the search to include funds that have moved into the second quartile over three years, four more portfolios make the list.

Fidelity Enhanced Income, managed by David Jehan and Rupert Gifford, is one such fund. It aims to deliver a yield of 50% more than the FTSE All Share index, using derivatives to enhance income.

In a decade where income has been out of favour, this strategy has struggled but came to the fore in 2022 when higher rates tanked the prospects of growth companies.

Despite its long-term weakness, analysts at Square Mile Investment Consulting & Research have a ‘Positive Prospect’ rating on the fund.

The £217m fund's underlying equity portfolio is run by Rupert Gifford, who takes a “cautious” approach that was developed by his predecessor Michael Clark.

He “identifies steady companies, which have tended to cope well with difficult economic conditions”, Square Mile's analysts said, which is “unlikely to produce startling returns” but “has proven particularly resilient during more troubled market periods”.

Jehan works on the options overlay strategy, which they described as “complex” but noted that it has “proven successful at delivering additional income”.

“The combination of these two elements, we think is an appealing proposition for investors who have an income requirement. However, unitholders must recognise that what is gained on the swings is likely to be lost on the roundabouts,” they concluded.

Other active funds achieving this lower threshold for returns were David Jackson and Stuart Briscoe’s £188m L&G UK Equity Income fund and Scottish Widows UK Equity Income, headed by Mei Huang.

The £880m iShares UK Dividend UCITS ETF, which tracks the FTSE UK Dividend + index, also made a second-quartile return over three years. It was also one of two funds to make top-quartile gains over one year.

The other was VT Downing Small & Mid-Cap Income. It is managed by Josh McCathie, who invests in 30-50 companies outside of the FTSE 100.

This strategy has suffered a double headwind for much of the past decade, with both income and (in particular) mid- and small-caps proving to be out of favour with investors.

It has been a boom-or-bust proposition in recent years, in the top 25% of the sector in 2021 and again so far in 2024, but registered bottom-quartile returns in 2022 and 2023.

Previously in this series, we have looked at the emerging markets, IA Global and Global Equity Income, and the UK All Companies sectors.

With the end of the summer holidays and the return to school nearly here, parents all over the UK will be considering the cost of childcare for the year, which currently averages around £14,836 per child.

In the UK, working adults earning less than £100,000 per year can receive a tax-free allowance of up to £2,000 per child, with parents of three- to four-year-olds entitled to anywhere between 15 and 30 hours of free childcare per term.

According to recent research by the team at Moneyfarm, by taking advantage of these forms of monetary support, the average UK adult could save up to £8,500 on childcare per year. This represents more than half of the total annual cost of childcare in the UK.

In London, the savings amount is even higher, rising to a potential £11,000 for applicable parents.

What free hours and Tax-free childcare can save you in childcare costs:

Source - Moneyfarm

While the government does plan to extend the eligibility for the 30 free hours of childcare by September 2025, it will still not be enough for many parents.

Indeed, parents face a conflict between securing this allowance and saving for the future, with these allowances denied if either parent has a net income of over £100,000.

Carina Chambers, pensions technical expert at Moneyfarm, said: “With the cost of childcare already at eye-watering levels, finding ways to make sure you keep every penny offered to you by the current system is simply a no-brainer”.

One way to get under the £100,000 price bracket is to invest in a pension. By contributing some of their salary to a pension, working parents can reduce their adjusted net income to under £100,000, qualifying them for monetary support on childcare, while ensuring they are building their retirement pot.

This, Chambers said, is a “win-win situation”, because it allows working-age adults to invest more for their retirement and relieves some of the tensions of the UK’s high childcare costs.  

This interaction between pension investment and childcare costs is a great example of how proper pension planning can ensure people get the most out of their retirement.

Earlier pension contributions will also help people maximise the benefit of an individual’s £12,570 personal tax allowance, which is reduced by £1 for every £2 earned above £100,000 a year.

While this may seem like a relatively small change, it would significantly improve people’s confidence that they will be able to retire comfortably, without sacrificing the ability to provide for their children.

Maximising your retirement

Putting more into a pension is crucial. As well as lowering taxes in the short term,  all savers should consider topping up their retirement pot as the cost of living keeps rising. The recent HL Savings and Resilience Barometer suggested that a couple would need around £36,840 per year for a moderate retirement.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown (HL), added: “Even boosting contributions by relatively small amounts over the years can have a big impact on how much you end up with.”

However, it is not all plain sailing when it comes to preparing for your retirement, and more still needs to be done to make a comfortable retirement more feasible.

Many working-age adults remain pessimistic about their pensions, with St James Place finding that nearly 26% of working adults feel they do not have the correct retirement plan to leave anything substantial to their families.

Equally, many current pensioners hold regrets over their retirement, with HL finding that almost four in 10 pensioners hold retirement regrets, with nearly 10% wishing they had begun contributing to their pensioners sooner.

Morrissey said: “No one wants to reach retirement rueing missed opportunities to boost a pension pot, and yet almost four in ten of us do. By far the most common regret is not having planned far enough in advance.”

Claire Trott, director for retirement and holistic planning at St James Place (SJP), added that planning ahead could also allow people to pass on their savings in the form of inheritance – another important calculation that should not be ignored.

“To secure a legacy for loved ones, it’s more important than ever to establish a robust financial plan early on. This will allow greater opportunity to build wealth over time, without making unnecessary sacrifices along the way and putting off retirement indefinitely,” she said.

Associating artificial intelligence (AI) with the Magnificent Seven stocks Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta is a mental shortcut that many investors take when thinking about the sector.

The fact that these are all mega-cap growth stocks might create the impression that AI beneficiaries must all be growth-focused disruptors, but that assumption is wrong, according to Paul Niven, manager of the F&C Investment Trust.

In the trust’s portfolio, there is one stock that overtook Nvidia over the past couple of years, and what’s more – it’s a value stock, which is synonymous for being cheap and undervalued.

Niven, who owns each of the Magnificent Seven (all except Tesla are part of the top 10 holdings), said they have contributed handsomely to the trust’s returns. In fact, the strategy has gone from the second quartile of performance over the past three years to the first over the past 12 months.

Performance of trust against sector and index over 3yrs

Source: FE Analytics

But speaking with Trustnet recently, he explained that by no means was this all due to the Magnificent Seven. There were other tech-adjacent names that performed well in the recent past, including Broadcom, TSMC and Qualcomm. But one in particular he was pleased with was Vertiv, which did better than AI darling Nvidia.

Vertiv is a beneficiary of the AI theme but it's not at the frontline in terms of designing or manufacturing chips. In fact, it is very much at the rear, providing cooling solutions as part of a wider range of services to data centres. As such, it has been driving the secular theme of AI by supporting the large-cap growth frontrunners.

Performance of stock over 1yr

Source: Google Finance

Vertiv is not in F&C’s benchmark, the FTSE All-World Index, but the trust has the ability to select its holdings from elsewhere too. And in this case, it paid off, with the stock rising 234% in 2023 and 82% in the first six months of 2024 (in sterling terms).

“It was selected by one of our value managers at Dallas-based Barrow Hanley, and it was very pleasing to see a value stock do this well at a time when value was significantly underperforming growth,” Niven said.

At the beginning of 2023, F&C had 2.2 million shares in Vertiv, but the manager has been taking profit.

“We’ve sold more than half of that position because the stock had gone up so much, and then subsequently sold 700,000 more,” he said.

“We could have made more money, but as a value manager, you need to manage that position, which was done that has done very well for us.”

At the end of last year the trust only had about 1 million shares left in the stock.

While the manager is pleased with the trust’s performance, which was able to beat its benchmark in 2024 so far, Niven wishes he had done more, telling Trustnet last week that he underestimated the market and should have added more gearing.

Utilities are getting a new lease on life thanks to the advance of artificial intelligence (AI), according to Michael Clarfeld, manager of the FTF ClearBridge US Equity Income fund.

As someone who runs a dividend fund, Clarfed understands saying utilities are a good investment may lead investors to roll their eyes at the cliché. But he is convinced that, while the old arguments for incorporating utility companies in income portfolios still hold (namely that they are “low-risk businesses that throw off nice dividends”), today the investment case is even more compelling.

That’s mainly for two reasons, he explained. The first one – and admittedly “the more powerful over the long term” – is the growth opportunities.

These companies aren’t known for their growth capacity and haven’t grown much in the past 20 years. However, that is bound to change as they should benefit from “really nice growth in the years ahead”.

“That’s a big change from the norm,” said Clarfeld, brought about by a combination of factors: electrification and the energy transition; AI’s needs for data centres; and climate change, which is generating the need to harden the grid, especially in the US where it has to cope with Californian wildfires, hurricanes in Texas and other extreme events.

All these phenomena are “huge consumers of capital”, which is a good thing for utilities in terms of their growth profile.

Performance of indices over 3yrs

Source: FE Analytics

The second incentive comes from their recent underperformance, as illustrated in the chart above. Utilities have had a positive move in the past couple of months, but underperformed “pretty significantly” in 2023, when interest rates worldwide were rising and investors were swapping them out, “thinking them as bond proxies”, said Clarfeld.

The fact that they are coming from this  “depressed level” might give them an additional boost from here on.

“Combine this with a low-risk business model and the fact that they’re trading at attractive valuations given the sell-off over the past couple of years, and we see high single-digit growth from utilities for a long time,” he said.

One stock in this sector that has done particularly well in the FTF ClearBridge US Equity Income portfolio is Williams, a natural gas pipeline company.

It is a type of utility, which owns the gas pipeline that moves natural gas from the production field to the end market.

It plays on two themes, Clarfeld explained – US energy, where there has been “tremendous growth” in energy production following the war in Ukraine, as people were looking for natural gas supplies outside Russia; and the AI data centres story, as “people try to figure out how are we going to power data centres”.

Additionally, as the world increases renewable energies, “you need backup sources for the days that the sun doesn't shine and the wind doesn't blow, and natural gas is a good play there”, the manager said.

Natural gas still yields north of 4% with “a net solid dividend growth”.

Clarfeld isn’t the only manager with eyes on this sector, however, with Sam Witherow, manager of the JPM Global Equity Income fund, maintaining his largest active overweight to utilities, as he recently told Trustnet.

Some 3.6 million people are expected to have to pay dividend tax in the coming year, coughing up around £18bn, according to a freedom of information request from analysts at AJ Bell.

This is double the amount that were paying the tax three years ago, said  Laura Suter, director of personal finance at AJ Bell. In the past year alone, a further 500,000 people will have to pay the tax thanks to the latest cut to allowances.

Historically, investors have been able to receive a small amount in tax-free income from investments held outside of a tax wrapper (such as an ISA) but in the past few years, this has been scaled right back.

The tax-free dividend allowance was cut twice in April 2023 and April 2024, initially from £2,000 to £1,000 and then again to £500. This has led to a marked increase in the number of people paying the tax.

On average, a fifth of all higher-rate taxpayers will now pay dividend tax, with an average bill of £5,379 each, while additional-rate taxpayers will pay £32,578 in additional tax.

Suter said: “With the limit sitting at just £500, more basic-rate taxpayers with modest investment portfolios are being dragged into paying the tax. If your investment portfolio yields 5%, you need to have £10,000 invested to hit the tax-free limit.

“The number of basic-rate taxpayers paying the tax is estimated to hit 1.7 million this year – more than treble what it was three years ago.”

As a result, the average dividend tax bill has dropped as more people with smaller dividends are pulled into paying the tax. Basic rate taxpayers are set to pay an average of just £385 this year, down from £780 three years ago.

“What’s particularly frustrating for some of these people is that they will have just breached the dividend allowance, meaning they now have to file a tax return for a piddling amount of tax,” said Suter.

A handful of funds made top-quartile returns during both the recent market downturn and two weeks of recovery that followed it – with the lion’s share of these investing in UK equities, analysis by Trustnet shows.

Worries about the health of the US economy and the lofty valuations in some parts of the market caused stock markets to drift downwards from mid-July, only for a full-blown rout to take place on Monday 5 August when investors unwound the Japanese carry trade.

However, equities have been rallying since then, as the chart below shows, with the MSCI AC World index gaining 6.2% (in sterling terms). Some of this recovery was down to new economic data suggesting the US economy could avoid recession.

Performance of MSCI AC World since 11 Jul 2024

Source: FE Analytics. Total return in sterling between 11 Jul and 16 Aug 2024

In this article, Trustnet looked for the funds that were able to maintain a top-quartile ranking in their Investment Association peer group during both periods – the summer slump and the fortnight-long recovery that followed.

Of the 3,676 funds with a sufficient track record and inclusion in a sector where quartile rankings are appropriate, just 25 – or 0.7% - achieved this. All of them can be seen in the table at the bottom of the article.

UK equity funds are the most common entrants on the list, with seven making the cut: five from the IA UK All Companies sector and one each from IA UK Equity Income and IA UK Smaller Companies (Artemis UK Smaller Companies, Aviva Inv UK Listed Small and Mid-Cap, FP Mattioli Woods UK Dynamic, HSBC Income, Invesco UK Equity High Income, Invesco UK Equity Income and Premier Miton UK Growth)

The UK held up better than areas such as the US and Japan when markets crashed, thanks to it representing better value than many of its peers and being the source of renewed investor confidence following stronger economic data and the change in government.

The largest fund on the shortlist is the £2.4bn Invesco UK Equity High Income fund, which limited losses to 1.6% in the market dip and has made 5% in the past fortnight. It is managed by Ciaran Mallon and James Goldstone; they also run the £1.1bn Invesco UK Equity Income fund, which is another to make top-quartile returns in both periods.

Invesco says both funds do not have an inbuilt style bias but Mallon and Goldstone look for good quality yet unvalued companies with strong cashflow generation. This has led to the likes of Barclays, Next, BP, RELX and Shell being among the top holdings.

In their latest update, published before the 5 August sell-off, the managers said: “We are particularly optimistic at the medium to long-term outlook for UK equities. In our discussions with clients over recent months we also sense a greater level of interest across a broad range of UK equity funds than we have seen for many years.

“At the heart of the interest is a growing appreciation that the UK offers exposure to many high-quality cash-generative companies that in many cases trade at valuations below global peers, even after taking account of differences in return on capital.”

Performance of Invesco UK Equity High Income vs sector since 11 Jul 2024

Source: FE Analytics. Total return in sterling between 11 Jul and 16 Aug 2024

Some UK funds on the shortlist – Invesco UK Equity High Income, Invesco UK Equity Income and HSBC Income – build their portfolios around large-cap stocks, especially those with a value tilt. This has helped as investors have returned to value stocks after a lengthy period of underperformance.

However, another recent trend is shown through the appearance of Aviva Inv UK Listed Small and Mid-Cap, Artemis UK Smaller Companies and Premier Miton UK Growth. These funds focus on opportunities further down the market capitalisation spectrum and UK smaller companies have been one of the strongest parts of the market in 2024.

FP Mattioli Woods UK Dynamic tends to invest around 10% of its portfolio in smaller companies.

David Stormont, a manager in Federated Hermes’ small- and mid-cap team, recently highlighted stronger economic data, improving consumer confidence and falling interest rates as strengthening the outlook for the UK.

“We believe this improving outlook will provide a strong tailwind for UK small-cap stocks. These companies earn a greater proportion of their earnings from the domestic economy than their large-cap peers, and have higher weightings to cyclical sectors such as industrials and consumer discretionary,” he explained.

“In previous cycles we have seen robust outperformance of UK small-cap companies over large-cap in periods of recovery and economic expansion.”

The full list of the 25 funds that were in the top quartile during both the summer slump and the recent recovery can be found in the table below.

Source: FE Analytics. Total return in sterling between 11 Jul and 16 Aug 2024

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.”