BlackRock is sticking with its longstanding underweight on long-term US Treasuries, citing structural concerns over debt sustainability and changing market expectations around risk.

This year US treasuries have been hit by heightened volatility driven by fiscal policy shifts and investor concerns over the nation's financial trajectory.

US president Donald Trump’s ‘One Big Beautiful Bill Act’, which includes significant tax reductions, has raised concerns about the potential for increased deficits. Analysts warn that such fiscal measures could exacerbate the national debt, which stood at $36.56trn as of March 2025

In its latest note, the BlackRock Investment Institute warned that the recent surge in US yields reflects deeper shifts in investor sentiment that are unlikely to reverse soon.

Michel Dilmanian, portfolio strategist at the institute, said: “We see this as a return to past norms and keep our long-held underweight.”

Since its low in early April, the yield on the 10-year US treasury has climbed roughly 50 basis points, reaching around 4.4%. BlackRock attributes this rise to a re-evaluation of the risks associated with long-duration government debt, especially in the US, where deficit spending remains elevated.

“Long-term US treasury yields are up sharply from April lows as policy shifts, like the budget bill, draw attention to US debt sustainability,” Dilmanian said.

Investor expectations have adjusted accordingly. During the pandemic, many were willing to accept minimal compensation for holding long-term government bonds, trusting in the perceived safety of US sovereign debt, but that sentiment appears to be reversing.

“Investors now want more compensation for the risk of holding long-term bonds,” the portfolio strategist said.

BlackRock had previously estimated that the US deficit-to-GDP ratio would likely fall within the 5% to 7% range. However, new spending plans embedded in recent US legislation and a broader recalibration of fiscal assumptions have increased the likelihood that deficits could exceed even this wide band.

This trend, coupled with last year’s downgrade of the US sovereign rating by Moody’s, is fuelling a rise in term premiums. Term premium refers to the additional yield investors demand for holding longer-dated bonds, reflecting both inflation uncertainty and perceived fiscal instability.

“Our strongest conviction has been staying underweight long-term US treasuries. We maintain that view as concerns about the deficit mount,” Dilmanian said. “We’re still underweight long-term developed market (DM) government bonds but have a relative preference for the euro area and Japan over the US.”

The upward movement in US yields is not occurring in isolation. Bond markets globally are adjusting, with notable shifts in Japan, the UK, and across the eurozone.

In Japan, the yield on 30-year government bonds reached a record high in May. The move followed the Bank of Japan’s decision to reduce bond purchases and came amid poor auction demand.

Similarly, in the UK the government has scaled back long-term bond issuance citing weak demand and rising costs.

In the eurozone, higher yields are also emerging but for different reasons. Increased spending on defence and infrastructure is expanding fiscal outlays, contributing to the rise in sovereign bond yields.

“Yet we prefer euro area government bonds to the US. They’re increasingly less correlated to fluctuations in US treasuries and a sluggish economy gives the European Central Bank more room to cut rates in the near term,” Dilmanian explained.

BlackRock’s underweight in US treasuries is balanced by an overweight in short-duration fixed income, as well as selected exposure to eurozone credit and sovereigns.

Despite the long-term bond underweight, BlackRock remains constructive on US equities.

“We flipped back to being pro-risk in April once it became clear that hard economic rules limit how far US policy can move from the status quo, such as how foreign investors fund US debt,” the portfolio strategist said.

“Our US equity overweight relies on that rule, just as another rule – supply chains can’t rewire overnight without serious disruption – proved binding on trade policy. This overweight is grounded in the artificial intelligence mega force – reinforced by Nvidia’s earnings beat last week.”

Check out the price/earnings (P/E) chart below and see if you can work out which John Lennon song pops into my head every time I look at it. And before you ask – no, it’s not ‘Give P/Es a Chance’ (sorry).

The chart shows the P/E ratios of actively managed European equity funds versus those of the index. It reveals how active managers in this arena have transitioned from being value investors in 2002 to being growth investors in 2025.

All told, the move represents a shift from a 10% discount to a 20% premium. This kind of makes sense, given the extended period during which growth has outperformed value in Europe.

Crucially, though, the tables have turned more recently, with value outstripping growth over the past three years. This is why a large proportion of managers have underperformed the benchmark during that period.

So why have they refused to face up to reality and adjust their exposures? Look at the top 10 holdings of most funds and you’ll see enormous overlap. Too often managers have crowded into the same stock in the belief it will just carry on rising.

It is in light of this shared delusion that Lennon enters the picture. As he famously sang in Imagine: “You may say I’m a dreamer, but I’m not the only one…”

Source: Artemis

When failure weighs heavily

Danish healthcare company Novo Nordisk offers a classic illustration. Many market participants became overly positive about its future prospects, only to see its attractions dwindle dramatically.

Novo was a darling of fund managers for many years. Not least amid mounting investor excitement about the company’s Wegovy weight-loss drug, its performance shot up by around 400% between 2018 and mid-2024.

The business’s P/E rocketed from 22x to 51x during the same period. The latter figure represented both a significant premium and major optimism. But then things started to go wrong.

Developing new drugs is always a complex business. Fierce competition from Eli Lilly in the US heaped further pressure on Novo, giving rise to the risk of ostensibly small setbacks being greatly magnified – and that’s exactly what happened.

Novo missed its consensus estimated earnings for the second quarter of 2024. It then saw Wegovy sales fall, especially in the US. Its investment appeal has since reduced faster than a devoted weight-watcher’s waistline.

With analysts revising down their projections for future growth, the company’s share price has halved in a year. All the dreamers who thought it might never stop going up have learnt a painful lesson.

Embracing value’s renewed appeal

Looking again at the above chart, we can see fund managers were predominantly value hunters in 2002. However, both from a fundamental and a share-price perspective, value began to underperform the market in 2006 – an experience that tempted many investors to ramp up their bets.

The relative P/E ratio for active funds was 29% higher than that for index funds by the end of 2021. The era of quantitative easing (QE) may have been a factor, with the low cost of debt encouraging investment in the expectation of never-ending growth.

Unfortunately for the dreamers – and this is often the case with financial markets – peak optimism coincided with excessive valuations.

As the chart below shows, value stocks started to recover around 2022. Their valuations were extremely good at that point, as illustrated by the large gap between the gold and blue lines, and their fundamentals were improving, as illustrated by the gold line’s rising trajectory.

Fast-forward to the present day and the reality is that the era of QE is well and truly over. We’re looking at a return to value, and most managers still have some way to go to rebalance their portfolios accordingly.

Having a value focus has been a drag for us on occasions, but over the long term it has served us well. The Artemis SmartGARP European Fund is top of its peer group over one, three and five years.

Ultimately, experience tells us expensive stocks tend to fall sharply when their growth stories stumble and the optimism seeps away – as the Novo Nordisk saga has demonstrated.

Of course, quality matters. When value outperforms it’s not because all value stocks rise – it’s because a handful rise exceptionally. The secret is to pick the best and avoid the value traps.

So we salute our peers when they talk about selecting great companies – but just be careful what you pay for them. Like Lennon, you may well imagine there’s no hell below us and only sky above, but there are limits to how far a stock can rise in price.

And when it plunges – well, that’s not a dream. It’s a nightmare.

Source: MSCI; Artemis

Harry Eastwood is investment director of the Artemis SmartGARP European fund. The views expressed above should not be taken as investment advice.

The global economy is undergoing a seismic shift and investors clinging to traditional approaches may be walking into danger.

According to Brian Dennehy, managing director at Dennehy Wealth, “buy and hold is a dangerous approach in this environment”. Earlier this morning, he argued that a bear market is now more likely, with sharp declines and brief recoveries marking a drawn-out transition from bull-market complacency.

Today, investors should focus on navigating this shift, which requires more than minor tweaks to portfolios and a complete new way to think about diversification.

“For much of the past 40 years, diversification was theoretical and a bit of a myth,” Dennehy said. “Everyone thought they were well diversified by investing 60% in equities and 40% in bonds. That wasn’t diversified at all, because both were driven by the same factors – falling inflation and falling interest rates.”

Below, the financial adviser shared his asset allocation ideas and the perfect portfolio to express them, with a selection of funds serving as examples.

“This is a more suitable mix than many of those that we've all been employing for the past number of years and it's designed for this transition period of market flip flops, of considerable uncertainty, inflation volatility and of entrenched vulnerability.”

All of the percentages and fund picks are not a strict prescription, he added, but rather a framework to help investors think more deliberately about risk.

Dennehy’s portfolio for real diversification

Source: Dennehy Wealth

The equity sleeve

Dennehy suggested that equities – specifically those offering clear value, regardless of style – could form up to 30% of a diversified portfolio. “Having a maximum 30% in equities is certainly not regarded as aggressive, on the contrary,” he said.

The equity sleeve is where investors can use momentum to choose funds that invest in his four preferred regions: the UK; Asia; Japan; and China. Exchange-traded funds (ETFs) are his preferred method to access these markets.

“Intraday dealing has become increasingly important in the environment we're in,” Dennehy explained.

This part of the portfolio will also capture some US upside as all of the above have some correlation to the US, but will come with “less downside when the US collapses”.

China is the exception to this rule, however, as it less dependent on the US and can power on independently. It is “undoubtedly” where investors can make the most money, he said, as long as they can accept volatility. Dennehy’s pick here was the iShares China Large Cap UCITS ETF.

Commodities and real assets

Commodities and real assets make up about 20% of Dennehy’s portfolio, providing inflation protection and some shock resilience. One way to populate this segment would be to buy one diversified commodity fund, for example the JPM Global Natural Resources.

Performance of fund against index and sector over 1yr

Source: FE Analytics

More sophisticated (and risk-tolerant) investors might want to focus on gold, for example, where Dennehy suggested a 50/50 split between gold and gold miners.

An alternative would be to invest half this segment in gold and the rest split between oil and oil equities (both of which are “very cheap” at the moment) and other things such as platinum or uranium.

“These areas are very volatile, so investors should only get involved if they are comfortable with high risk, can follow the market closely and apply stop losses”, he warned.

Low-volatility funds

The purpose of this section, which takes up 20% of the adviser’s portfolio, should be to take advantage of the “limited link, if any”, to the US stock market that funds in the IA Absolute Return, the IA Strategic Bond, the IA Mixed Investments 0-35% Shares and potentially the IA Specialist sectors have.

Most have the ability to perform in almost all market conditions, and investors should allocate “a small selection with different styles”.

“The best funds in both the absolute return and strategic bond sectors can really pay off now – their time has come,” Dennehy said, giving Orbis Cautious, a fund with a maximum FE fundinfo Crown Rating of five, as an example.

A tip for finding funds with low volatility is to look at their performance charts, such as the one below of the Janus Henderson Absolute Return and Artemis Short Duration Strategic Bond funds.

“You can almost observe the low volatility as both these funds look quite steady,” he said.

Performance of fund against index and sector over 1yr

Source: FE Analytics

Index-linked bonds and cash

A 10% allocation to index-linked investments acts as a shock absorber in an environment where “there will be plenty of shocks”, and provides inflation protection without the volatility of gold.

Here, the areas to pick from would be the UK, the US and global funds, either through active management or ETFs. The percentage allocated to cash was 20%, with the option to invest in opportunities as they arise, or just “to help you sleep better at night”.

Stop losses and stop profits

Dennehy stressed that it is not just about the asset allocation and fund choices, but also investor discipline.

“Stop losses are absolutely vital, and a stop profit will be too. Take profits more quickly where you can, because in this period, profits quickly made can also be pretty quickly lost,” he said.

“Markets are going to swing by and they're going to swing fast. ‘Buy and hold’ is dangerous, and protecting gains is as important as cutting losses”.

Retired couples will need £1,600 a year more than they required in 2024 to live a comfortable retirement, according to the latest figures from the Pensions and Lifetime Savings Association (PLSA).

Two people living together will need to amass £60,600 per year to live comfortably, up from £59,000 last year. For more moderate retirees, the figure stands at £43,900, around £800 more than a year ago.

Those on their own will require £43,900 (or £800 more than in 2024) for a comfortable life and £31,700 (£400 more) for a moderate retirement.

How much annual income is required for different retirement levels

Source: PLSA

A moderate retirement assumes retirees have one foreign holiday a year and eat out a few times a month. A comfortable retirement includes subscriptions to streaming services, regular beauty treatments, a foreign holiday and several UK minibreaks a year.

However, the minimum needed to survive retirement has dropped £800 from £22,400 in 2024 to £21,600 this year. This can be covered by two people receiving the state pension, which pays £11,975 each.

This level of retirement is the most basic, including one UK holiday per year, eating out about once a month and affordable leisure activities about twice a week. It also excludes car payments, which are only included in the higher brackets. The below table shows the full breakdown of each category for couples.

The criteria for a minimum, moderate and comfortable retirement

Source: PLSA

The minimum has also dropped for single people, with the total now standing at £13,400, down £1,000 from last year, although some additional savings will be required as the state pension will not cover the entire cost of living.

This decrease is “primarily due to a substantial reduction in energy costs and some small spending adjustments made to the living standard by research participants”, the Retirement Living Standards report found.

In terms of pot size, those in couples will require £300,000 to £460,000 for a comfortable income, £165,000-£250,000 for a moderate life and no savings for the minimum. These figures are based on an annuity paying 5 to 7.5%.

Single people will need much more. For the minimum standard of living a pot of £20,000 to £35,000 is needed, but this jumps to £330,000 to £490,000 for a moderate life – broadly the same as a couple requires for a comfortable retirement. To live comfortably, lone retirees will need between £540,000 and £800,000.

Total size required for different retirement levels

Source: PLSA

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said there were some key takeaways from the report. Firstly, the state pension is vital and “will get you a long way towards achieving a minimum standard of living in retirement”. Secondly, it is harder for single people, who are unable to share costs with a partner.

Renters will struggle, she added, as these figures do not consider rental costs, which will “really push up your living costs”.

Alexandra Loydon, group advice director at St. James’s Place, said the figures should “serve as a wake-up call” for savers across the country to start thinking seriously about their pension and building up their retirement pot.

“When comparing today’s PLSA figures to our recent financial health research, which found that one in five (23%) UK adults believe they’ll only need a total retirement pot of £50,000 to live moderately well in retirement, it’s worrying that many people are underestimating their retirement needs,” she said,

“While it’s encouraging to see that the amount someone needs in retirement to secure a minimum standard of living in retirement has fallen from £14,400 to £13,400, it’s important to understand that this only covers your basic needs in retirement.”

AJ Bell director of public policy Tom Selby said there was some good news for savers, as rocketing inflation is now easing, which is represented by the drop in the minimum retirement and the slowing of increases for those looking for moderate or comfortable retirements.

“This is clearly a positive development although the nature of inflation means living costs for everyone, including retirees, will almost certainly be permanently higher in the future,” he said.

“And there is no getting away from the fact that the pension pot sizes needed to achieve the moderate or comfortable living standards, particularly for a one-person household, are staggeringly high.”

 Zoe Alexander, director of policy and advocacy at the PLSA, said automatic enrolment sets pension contributions at 8%, which is a “solid starting point” – especially for those who begin early.

“But for many, saving 12% or more offers a better chance of reaching the retirement they expect. While defaults may rise in the future, it’s important for savers to consider whether 8% will be enough for their goals,” she added.

Morrissey noted these figures are not “hard and fast” and said that retirement is based on individual needs, suggesting retirees use online calculators to keep track of whether their pension will sufficiently match their lifestyle.

“This will either give you the confidence of knowing you’ve got enough or the time to put a plan in place if you haven’t. They can even be used to model the impact of boosting your contributions over time so you can see how much small changes can help you move towards your retirement goal,” she concluded.

Investors are facing the biggest global economic shift in a generation as the post-second world war order is being dismantled.

This is not happening by accident but by design, according to Brian Dennehy, managing director at Dennehy Wealth. “All of the elements that have been in place for decades are now collapsing. It’s the biggest shift in a generation," he said. "[Current] US policy is to deliberately collapse the post-war infrastructure.”

The implications for investors are seismic – from debt and demographics to geopolitics and technology, the foundations of market stability are cracking. Dennehy’s message to investors is blunt: the US is no longer the safe haven it once was.

Many of the structural quirks of the US market that were once overlooked in the name of American exceptionalism may no longer be tolerated.

“The US has some exceptional features, but it’s not that exceptional,” he said. “Be wary if you have assets of one kind or another in the US, because that will be an issue at some point.”

Equity valuations

One of the most glaring concerns is valuation, particularly for the stock market. Equities in China, Japan and the UK remain significantly cheaper than the US. For example, the US market’s price-to-book ratio is still more than three times higher than Japan and China, and two and a half times that of the UK.

“This just doesn’t reflect where the better returns will be. That’s the opportunity. The risk lies in staying overweight the US,” said Dennehy. “In the years ahead, the best investment returns will be moving east. And this isn’t reflected at all in valuations.”

The shift is already visible. Capital is flowing out of the US, just as retail investors are piling in, said Dennehy.

The period we're in now is a transition, as money is moving from the hands of the institutions to “weaker hands”, he added.

“What we can expect is hesitation and volatility. After that, we’ll get the bear market, with the sharpest falls yet,” he said. “Then, eventually, a reset and recovery will come, with some of the best opportunities of your life.”

US bonds are also a concern

In fixed income too, a crisis has been brewing for decades and is now hitting the breaking point. US treasuries are facing a trust crisis as countries that once funded America’s deficits by buying treasuries – China, notably, but Europe too – are stepping back.

“People say the US will never default, but the world isn’t so sure anymore,” he said. For example, president Donald Trump could halt payments to Chinese treasury holders, which would be an effective default on the debt, if political tensions with Asian powerhouse escalate to catastrophic levels.

“The risk isn’t just financial – it’s about control and potential confiscation,” Dennehy said. “As Trump and the authorities in the US see all this money leaving, what they [could] do is introduce capital controls to restrict that money leaving the country. If history is a guide, that's almost a certainty.”

This is just one of the reasons why long-dated treasury yields have been rising. If they break much above 5% and stay there, “there will be real problems for markets”.

Demographics are changing – and not for the better

Another hard-to-escape issue is demographics. The post-war boom in births created a social contract based on a growing, tax-paying workforce. But now, as people age, the maths no longer works. This is true not just for the US but for all developed countries.

“Demographics is destiny,” said Dennehy, who argued that “this may be the most predictable crisis of the past 100 years”.

US bulls often point to artificial intelligence and other technologies as drivers of long-term productivity gains as a way to counterbalance this, but these are more likely to fuel disruption than deliver growth in the near term, according to the director.

“There’ll be job losses and new industries emerging, but we don’t know if those gains will match the losses,” he said. “Historically, new tech only delivers at scale during wars. Wars accelerate tech.”

Don’t count on central banks

The world is shifting in fundamental ways. Isolationism, capital flight and capital controls aren’t hypothetical anymore – and this time, quantitative easing won’t save investors from the downside.

Since 2009, central banks have suppressed normal market signals. “We never had a proper reset after 2008,” Dennehy said. “Instead, we got a central-bank experiment, which fuelled a historic stock market bubble.”

Now, that bubble is bursting, and the question is how bad the damage will be. Unlike in the UK, US mortgages are based off the price of long-dated bonds. Higher yields mean a generally higher cost of borrowing, which in turn means higher inflation and slower growth – a stagflationary scenario that often precedes a recession.

There’s no going back from this situation, according to Dennehy. “Demographics can’t be reversed. Trust, once lost, takes years to rebuild,” he said. “Complacency was tragic for investors from 1929 and will be tragic for many investors when eventually the market begins to break down from its peak and begins to move towards those much lower levels.

“Even a mild recession in the US stock market, which is extremely vulnerable in valuation terms, and the world is going to be in trouble.”

The UK treasury has sold its final shares of NatWest, bringing the UK bank back into full private ownership after it was bailed out during the global financial crisis.

Bank chairman Rick Haythornthwaite described this as a “major inflexion point” and opportunity for the UK business, which was once 84% owned by the government.

The holding has been prosperous for the government and its other shareholders in recent times, making 191% over three years on a total return basis, significantly outperforming the FTSE All Share, and some asset managers believe the stock can continue to impress.

Total return of NatWest and FTSE All Share over the past 3yrs

Source: FE Analytics

Below, fund managers tell Trustnet whether NatWest can sustain this impressive run or if it might be time to consider other options.

Aegon’s Ahmed – An island of stability

Sajeer Ahmed, investment manager at Aegon Asset Management, said: “Despite strong outperformance versus the FTSE All Share, we remain positive on NatWest.”

While rising interest rates have boosted earnings since 2021, valuations have not caught up. At the time of writing, NatWest trades at a price-to-earnings (P/E) ratio of around 9x, which remains an undemanding multiple. By contrast, the FTSE All Share currently stands at a P/E ratio of around 13.4x.

“Put another way, the stock offers an earnings yield of more than 12%”, he said, which is distributed to shareholders via dividends and share buybacks, and should persist as the business attempts to improve its operational efficiency.

It is also a beneficiary of recent global market uncertainties, he argued. US president Donald Trump’s ‘Liberation Day’ tariffs have increased geopolitical and trade tensions, leading to defensive UK assets such as banks emerging as an “island of relative stability” and a “relative safe haven” over the long term.

“This narrowing risk premium towards UK assets, continued earnings growth, and an attractive distribution profile are all factors that should help to support the positive investment case in NatWest shares”.

Lansdowne’s Davis – Expect stronger returns in the years ahead

NatWest is the largest position in Peter Davis’ Lansdowne Developed Market fund. The co-manager said there were two “basic truths” of banking that investors need to be aware of.

“First, it is an industry that tends to grow at least in line with nominal GDP over time. Second, economies of scale are compelling, both from cost efficiencies and because new business flows tend to be less profitable than the sticky stock of customers, rendering new entrant economics poor”, he told Trustnet.

As a result, while the sector is regaining momentum, more established businesses such as NatWest will be the biggest beneficiaries.

Additionally, they are still heavily underestimated by investors, he explained. Since the global financial crisis, investors have priced “incredibly high risk premiums” into UK banks that are “increasingly hard to validate”. Not only are banks very different businesses than they were in 2008, but the average UK consumer is also in a much healthier position.

Additionally, bank returns have been relatively understated due to banks' tendency to hedge interest rates. If these hedges start to unwind, “we can expect even stronger returns in the years ahead” from businesses such as NatWest.

Man Group’s Barrat – We are looking further down the range

However, not all portfolio managers favoured NatWest. Jack Barrat co-manager of the Man Undervalued Assets fund, said: “The sector as a whole has re-rated in the past year and we are looking further down the range”. The fund includes Barclays and HSBC in its top 10 holdings.

Despite generating significant capital since the global financial crisis, valuations have remained consistently low for a prolonged period, creating a solid foundation for further outperformance.

Additionally, banks have achieved these returns despite loan growths being much lower than historical averages. If loan growth starts to increase, it would only add “another leg to their story.”

“The sustainability of current earnings is increasingly high,” he concluded.

JOHCM’s Beagles – We are on our way to selling out of NatWest completely

While NatWest was formerly one of the largest holdings in the JOHCM UK Equity Income fund, manager Clive Beagles plans to sell out entirely.

“I suspect we are on our way to reducing it to 0%. A year and a half ago shares were about £1.60, now they are more than £5. It is just no longer particularly cheap, and the investment case has played out,” he said.

However, there are plenty of cheaper opportunities in the UK banking sector benefitting from similar tailwinds at much lower costs, such as Barclays, which is “still sitting on the naughty step of valuation metrics”.

Indeed, while Barclays' share price is up by 90% over the past three years, this is still lower than NatWest, which surged 129.2%.

Share price of NatWest and Barclays over the past 3yrs

Source: FE Analytics

While its return on equity is currently lower than NatWest's, it is planning a range of self-help and restructuring programmes, which will provide a significant tailwind to a business that already offers double-digit returns in share buybacks and dividends.

Regulation, he noted, has become much more favourable in recent years, with banks no longer being regarded as the “old enemy” of the UK market. As a result, there is significant turnaround potential in the more undervalued UK banks, he concluded.

India’s economic fundamentals remain robust, making it one of the most promising growth stories in the emerging markets. Key macroeconomic indicators, including the fiscal deficit, current account deficit, and inflation, are all within manageable limits.

The banking sector remains stable, and household leverage remains under control, providing a solid foundation for sustainable, future growth. These factors put India in a strong position to navigate the complexities of a shifting global economy, offering a beacon of stability in uncertain times.

In the aftermath of the 2024 elections, the country encountered a typical mid-cycle slowdown. This phase was marked by a dip in growth due to reduced government spending and a tightening of consumer credit, especially in urban areas where consumption was one of the drivers of economic expansion.

Whilst the slowdown caused concern, it was a natural part of the economic cycle and India’s growth trajectory remained intact. By November 2024, growth had bottomed out and, thanks to a rebound in government spending and the easing of credit restrictions, the outlook for the country has since brightened, with a better economic growth outlook.

India’s fiscal and monetary flexibility provides a strong foundation for accelerating growth when needed, making it a resilient economy and allowing for swift and strategic interventions to drive the economy.

The Reserve Bank of India (RBI) has already started its rate-cut cycle, and the government has taken significant steps to boost consumption. Personal income tax cuts for the upcoming fiscal year are helping to increase disposable income, stimulating consumption growth and supporting the wider economy.

These measures are expected to catalyse a stronger recovery, with GDP growth projected to reach 6.5-7% in 2026. This recovery will likely fuel earnings growth, which is forecasted to accelerate from a moderate 7-8% in 2025 to a more robust low-to-mid teens over the next few years.

Recent valuations of the country’s top 100 companies have fallen below their 10-year average, presenting a compelling investment opportunity.

With a more attractive price point, investors have an opportunity to capitalise on the country’s long-term growth prospects as corporate earnings catch up with the recovery. Key sectors, including technology, pharmaceuticals, and infrastructure, remain poised for expansion, driven by domestic and global demand.

India’s exposure to external trade risks is another factor in its favour. While many larger economies are grappling with the consequences of geopolitical tensions and rising tariffs, India’s vulnerability is relatively low.

The country’s trade deficit with the US, at $45bn, is far smaller than many other major economies, with a significant portion of the deficit (around 25%) driven by generic pharmaceutical exports. This limited exposure to potential trade barriers provides India with an added layer of resilience in the face of global disruptions.

Looking ahead to the future, India is set for a period of strong earnings growth. Projections suggest that over the next three to four years, corporate earnings will accelerate to the low-to-mid teens, driven by higher government spending, an improved credit environment and a rise in domestic consumption.

The country’s strong demographic trends, combined with a stable macroeconomic environment, will continue.

Overall, the economic outlook remains bright. The country’s fiscal flexibility, pro-growth government policies, attractive valuations and limited exposure to global trade risks make it an increasingly attractive destination for investors.

As it recovers from its mid-cycle slowdown, India is well-positioned to continue its upward growth trajectory, offering significant opportunities in the years ahead.

Murali Yerram is portfolio manager of the Franklin India fund. The views expressed above should not be taken as investment advice.

Technology stocks powered ahead while healthcare companies were left languishing behind in May as markets continued to be dominated by the whims of US president Donald Trump.

Last month was a relatively strong one for equity markets up until Trump announced negotiations with the European Union were not moving forward and suggested imposing 50% tariffs on the bloc from the start of June.

There was even more turmoil last week when a panel of judges in the US ruled the tariffs illegal, potentially putting the kybosh on the US president’s aggressive trade policy.

The US government is likely to either appeal or look for alternative ways to force through its agenda, according to experts, but Ben Yearsley, director at Fairview Investing, said there was a clear trend to the tariffs: “Backtracking leads to markets rising, tough talk and markets fall”.

It was far from the only US story last month, with government bond markets firmly in the crosshairs after ratings agency Moody’s downgraded US credit. US 10-year treasury finished last week paying 4.4%, up from 4.16% at the start of May.

Meanwhile, although the UK wasn’t downgraded last month, government borrowing unexpectedly rose to £20bn in April and borrowing in the year to 31 March 2025 was £11bn higher than forecast.

The UK 10-year gilt had a similar move to its US counterpart. It offered 4.44% at the start of May but ended last week with a yield of 4.65%.

Both the UK and US bond sectors were among the worst-performing Investment Association peer groups last month, representing four of the five biggest fallers, as the table below shows.

Source: FE Analytics

The worst, however, was the IA Healthcare sector, where funds dropped 3.8% on average. Trump signed a new executive order aimed at lowering US drug prices by requiring pharmaceutical manufacturers to match the lower prices in other high-income countries.

Janus Henderson research analyst Luyi Guo said: “Under the proposed ‘most-favoured nation’ policy, if a prescription costs $50 in the US but only $20 in another developed country, the US government would tell the drugmaker it is only willing to pay $20 for that drug.

“Overall, while we are encouraged by Trump’s moderately more constructive tone on the proposed policy, we recognise the risks it poses in its current form. Broad drug pricing controls could reduce funding, slow innovation, and put jobs at risk – not to mention threaten the United States’ global leadership position in this vitally important industry.”

It was not all bad news, however. Smaller companies did well, with UK small-caps, European small-caps and North American Smaller Companies all featuring in the top five sectors.

Yearsley said: “The Mansion House Accord possibly helped UK smaller companies with rumours abounding about a large allocation to UK small-caps in the near future."

The top of the pack was the IA Technology & Technology Innovation sector, up 9%. Although this was below the returns made by the tech-heavy Nasdaq index, Yearsley said a strong pound was a headwind for UK investors.

Strong results from market darling Nvidia helped tech stocks in May, as did a month of relatively sanguine news from the White House.

Tech funds were well represented in the top-performing individual funds over the past month, which included the likes of Polar Capital Global Technology and Liontrust Global Technology.

Source: FE Analytics

WisdomTree Blockchain UCITS ETF and Invesco CoinShares Global Blockchain UCITS ETF were the top two performers, up 17.2% and 16.9% respectively.

At the foot of the table, healthcare funds were well represented with both active and passive strategies littering the bottom 20 performers, with more than three-quarters of the list taken up by biotechnology and pharmaceuticals specialists.

JPM Emerging Europe Equity was also notable, said Yearsley, as “hopes of an imminent ceasefire and end to hostilities in Ukraine faded”.

Turning to investment trusts, there were no new takeovers last month but Blue Star Capital shot higher, up 121%, as one of its holdings – SatoshiPay – announced strong transactions on its payments platform Vortex. The trust has a 27% stake in the company.

Source: FE Analytics

Seraphim Space Investment Trust also did well, up 41.7%, as its satellites have been playing an increasingly important role in the war between Russia and Ukraine.

Interactive investor’s Ian Cowie said: “Monday’s decision by Friedrich Merz, the German chancellor, to back Ukrainian missile strikes even deeper into Russian territory helped propel the price higher.”

Yearsley also highlighted that several infrastructure trusts had performed better last month, which he attributed to forecast interest rate cuts. These should “help the embattled infrastructure sectors”, he noted, adding “there did seem signs of life”. IT Insurance & Reinsurance Strategies was the second-best performing Association of Investment Companies (AIC) sector in May.

On the downside, Aquila Energy Efficiency Trust led the biggest losers. It was one of a number of trusts in managed wind-downs, which skewed the results. This includes abrdn Property Income.

Trusts in wind-down sell and return the cash to shareholders, making it look as though the net asset value has reduced, even though shareholders have not lost out.

China is no longer the problem it was, Korea is beginning to benefit from meaningful structural reforms (and could be the new Japan), and Vietnam’s high-growth narrative is starting to show signs of strain. This is the view of Pauline Ng, co-manager of the JPMorgan Asia Growth & Income trust.

In uncertain markets where investor sentiment can shift as quickly as returns, staying informed is essential to seizing opportunities rather than missing them.

This is particularly true in regions where the noise is at its loudest, such as China.

China has entered a new phase

Long viewed with scepticism due to its policies, unpredictability and the lingering drag from a troubled property market, China “has now entered a new phase”.

While geopolitical concerns are valid, “the macro risk in China is a bit of a muddle through,” Ng said, and dismissing the entire region because of it could mean leaving returns on the table.

“Internally, we do not expect any huge bazooka-like stimulus, but we’re not expecting a massive collapse anymore. More importantly, a lot of valuations have also reset to a more palatable level. Before this whole reset, it was really hard to find opportunities,” she said.

What’s changing isn’t just sentiment, but corporate behaviour. “Some of the bigger companies have been engaging a lot more on committing to a dividend policy, committing to share buybacks.”

Even in the battered property sector, which has weighed heavily on the market, Ng sees evidence of a floor.

“In tier-three and four properties, there’s still a lot of oversupply. However, tier-one property prices have already stabilised and that roughly makes up about 70% of the total market in China. We do not expect a systemic risk anymore, which is very important.”

The shift also extends to the political climate for China’s large private-sector firms. “A couple of years ago, the government was very strongly against the large private sector in China,” she says. “But in more recent months, we have seen that shift. Alibaba and Tencent have announced bigger capex plans to make sure that China continues to invest on artificial intelligence and not be left behind.”

Vietnam has no room to grow

In contrast, Vietnam – once a regional darling due to its central role in the ‘China plus one’ strategy, whereby companies diversify supply chains in emerging markets beyond China – is now being approached more cautiously by the trust.

“Vietnam is a country which, in terms of the impact of US tariffs, has less room to negotiate,” says Ng. “It will not be able to import enough US aircrafts, fighter jets or liquid gas to reduce the trade deficit with the US dramatically.”

That alone creates risk, especially in a more protectionist global environment, which will also affect Vietnam’s labour growth, wage growth and domestic consumption.

Korea financials erode value, but there is upside

Korea, by contrast, is where the trust has taken its most constructive stance, despite ongoing financial underperformance and widespread scepticism about the government-led ‘Corporate Value-Up’ programme, aimed at boosting shareholder returns and corporate governance.

Investors, Ng believes, are ignoring what could be a meaningful re-rating story.

“The market is not factoring in any corporate value improvement from Korea,” she said. “But we have to acknowledge that this is something that will play out over time. If you look at the experience of Japan, it didn’t happen in one year. It took many years.”

Korean financials in particular illustrate the upside.

“Today, the return on equity (ROE) of Korean financials is below the cost of capital,” Ng noted. “This tells you that every dollar actually destroys value. Now imagine if they are able to improve the capital return, which then directly improves the ROE – they would go from very challenged to perhaps more standard financial companies. In that process, the re-rating will be the upside that we believe in.”

Indonesian banks continue to increase market penetration

JPMorgan Asia Growth & Income is also overweight Indonesia and financials in particular – an industry with two key advantages. Firstly, there is “a lot of room for banks to increase their credit penetration”. Secondly, the top three or four banks continue to win market share from the rest of the banking sector.

“So you have this very unique situation whereby the addressable markets have a lot of room to grow and these players have also corrected a lot in the past six months,” Ng said.

India is worth looking at despite high valuations

Ng runs a small overweight in India, which remains an expensive market despite the recent de-rating.

“India remains a very attractive market when you think about the long-term ability for growth compounding. So we are not going to say that, because India is very expensive, people shouldn't go there,” she said.

“With India, this just doesn't make sense, because it's still one of the better growing markets within Asia. It has fantastic demographics and many companies that are very well run.”

Particularly in India (but also in China), the market is very deep and offers opportunities to stockpickers, the manager said.

“Our fund is not about being maximum bullish India, maximum underweight China or vice versa”. The trust also doesn’t take style bets on growth or value, which in Asia are particularly counterproductive, as she recently told Trustnet.

“Instead, we are bottom-up stockpickers who follow a balanced approach by looking for companies that they believe will outgrow the industry.”

The JPMorgan Asia Growth & Income has beaten its benchmark, the MSCI AC Asia ex Japan index, over the past 10 and three years, falling slightly behind over five and one, as the chart below shows.

Performance of fund against index and sector over 1yr

Source: FE Analytics

New investors are coming into the world of investing at a difficult time, with markets wobbling on the back of US president Donald Trump’s trade policy, outbreaks of war across the world and a general unease that valuations have become too high. Things are not much better in the world of bonds, where markets have been equally volatile.

One thing most advisers agree on is that it is a good time to diversify, but this can be particularly challenging for a first-time investor, who may not know where to start.

For Ben Seager-Scott, chief investment officer at Forvis Mazars, anyone new to investing should consider something simple and well-balanced by adopting a variation on the traditional 60/40 portfolio, which splits between 60% in global equities and 40% in bonds.

Instead, he suggested 60% in equities, 30% in bonds and 10% in alternatives – namely gold.

This offers the maximum amount of sector, regional and asset class diversification in the smallest amount of funds possible, which should feel less overwhelming to new investors. However, he noted that it is still best to take a long-term approach, preferably around 10 years.

In this way, the portfolio can then be built over time as risk tolerance changes, offering a solid foundation for a first-time investor to hold over the long term, he explained.

Because global equities should drive long-term returns, this should also be the largest allocation within the portfolio, he explained, even if the current environment seems as though markets are struggling at present.

“If you are looking for true diversification, you need to cover as many names in your portfolio as possible. Broad index-based approaches are probably the best way of doing this in equities and bonds,” he said.

As such, he would put 50% in a global equity tracker, such as the SPDR MSCI All Country World UCITS ETF. This ensures most of the portfolio is invested in a wide set of markets and names, avoiding high-conviction stockpickers introducing stock-specific risks. Picking a tracker also gives exposure to those top-performing mega-cap stocks in the US that have dominated the past decade and could continue to do so – although there are no guarantees.

Performance of the fund vs the sector and benchmark over 5yrs

Source: FE Analytics

While this is a great start, an overexposure to large-cap stocks and a high US weighting mean “you will get a lot of tech in your tracker,” he said. This has been “great for returns” in the past but “not so much for diversification”.

As a result, a UK tracker such as the iShares Core FTSE 100 UCITS ETF is a good addition to a diversified portfolio, he explained.

The UK market is led by a very different set of companies to the US (which dominates the global market). For example, the FTSE 100 has much lower weighting to tech (4.6%) than the global index and instead is led by banks (14%), healthcare (12.9%) and industrials (11.8%).

Performance of the fund vs the sector and benchmark over 5yrs

Source: FE Analytics

These funds provide the stock market foundation for a diversified portfolio, but first-time investors should also aim to have a wide variety of names in their fixed-income allocation.

Seager-Scott said: “You cannot just rely on government bonds for your fixed income returns.” As such, a 20% allocation towards a global bond fund, such as the Vanguard Global Aggregate Bond UCITS ETF, would give investors “access to the range of underlying fixed-income asset classes and markets”.

Performance of the fund vs the sector over the past 3yrs

Source: FE Analytics

However, just adding a bond fund is not enough to bring true diversification, said Seager-Scott, who suggested putting 10% in the Royal London Index Linked Bond fund, managed by Ben Nicholl and Paul Rayner.

Bonds tend to underperform when inflation rises (as interest rates tend to rise to combat higher prices, increasing yields and dropping the price). This inflation-linked bond fund should help to mitigate this and add more diversification.

Active management is preferred here to avoid having a similar duration to the index, said Seager-Scott.

Performance of the fund vs the sector and benchmark over the past 10yrs

Source: FE Analytics

Lastly, in the alternatives bucket, he had one stand-out choice: gold. While there are numerous options, including hedge funds, private equity, infrastructure and property – to name just a few – Seager-Scott said investors are better off “keeping it simple” with a 10% allocation to iShares Physical Gold.

The precious metal is a favourite safe haven for some investors, particularly this year, as rising stock market volatility caused a surge in the gold price.

Performance of the fund vs the sector over the past year

Source: FE Analytics

“It might sound controversial, but gold is by far your easiest alternative, and you do not need to get your head around what esoteric, derivatives-based, crazy multi-asset fund someone might be trying to deliver”.

Multi-asset funds often attempt to be ‘one-stop-shops’ for investors, holding a variety of alternative assets such as gold, infrastructure, cash or derivatives.

But funds that claim to be the “only thing you need to own” are often far too complex for their own good, according to Jacob De Tusch-Lec and Jack Holmes, managers of Artemis Monthly Distribution fund.

“The reality is that a lot of these complex multi-asset funds get in their own way,” Holmes said. “They tend to do things that unexpectedly double up on each other, or even directly offset each other.”

De Tusch-Lec added that when a multi-asset fund starts using alternatives, both investors and managers can get confused and misunderstand exactly what they are holding.

By contrast, Holmes and De Tusch-Lec described their approach of combining equity positions from the Artemis Global Income and bonds from the Artemis High Income fund as “relatively straightforward”, claiming it has been key in making Monthly Distribution the top performer in the IA Mixed Investment 20-65% sector over the past one, three and five years, and the second best over 10 years. 

Performance of the fund vs the sector and benchmark over 5yrs

Source: FE Analytics

Below, the managers explain how simplicity guides asset allocation, why investors have developed a distorted view of the world, and why their biggest recent mistake was not sticking harder to their convictions.

What is your investment process?

De Tusch-Lec: The fund tries to find good value and good income and combine them into a single, relatively straightforward solution.

Holmes: Ultimately, what we’re trying to do is take our independent income funds and get the best of both worlds from them. For example, we’re both trying to produce a high level of income, but I could do that alone, what I can’t do is grow that income like Jacob can.

Why is simplicity so important?

It allows us to move quickly. In fixed income, I might buy a bond that’s trading at relative discount of 100 basis points, and it could close that gap in a month, so you need to find something new. Simplicity helps with that.

At other firms running multi-asset strategies, the funds can be so complex you need to explain your asset allocation in very generic terms to someone who does not understand the asset class. That’s not really a great way of approaching asset allocation, but it’s a great way of having arguments.

De Tusch-Lec: People are often surprised by how static our asset allocation is, but because the fund is simple, we can make a lot of changes under the bonnet that don’t appear in the asset allocation.

We could have 50% in equities at two different points, but it’s going to be massively different if we own a high-beta bank at one point or a high-risk equity at another.

What’s your view on global markets?

On the equity side, the period after the financial crisis including the pandemic was an exception that investors have taken as the new normal. I don’t think we’ll ever be going back to a period of 0% rates or quantitative easing.

This ‘regime change’ means that different types of assets will perform well. For example, we like companies benefitting from government spending, such as defence companies, and we’ve been underweighting our exposure to tech.

Within our respective universes, everything is now in flux, and so investors can’t assume ‘rules of thumb’ about asset classes that worked for the past 10-15 years will continue.

Holmes: On the bond side, the fundamental issue is with governments. For the first time in 70 years, consumers and corporates look healthy, but government debt doesn’t.

The natural thing a competitor might do in a multi-asset fund is own a lot of long-duration assets to hedge the equity exposure. We are not really doing that because that’s not a great hedge anymore in this new regime.

What were your best and worst calls in the past year?

Holmes: On the fixed income side, the worst call was probably hanging onto inflation-linked bonds. I thought longer-term inflation would have been more of a concern, but it’s just not played out like that.

The best thing was owning a lot of short-dated high-yield bonds. In hindsight, I should have just committed to my convictions harder and owned more of them.

De Tusch-Lec: On the equity side, our best call was buying defence and our worst call was not owning enough of It. Defence has been a main driver of returns for years, but in this fund we did not own as much. Defence companies have done much better than expected.

In a world in flux, you should be willing put a decent amount of capital behind your ideas and commit to them, perhaps more than you otherwise would.

What are your hobbies?

De Tusch-Lec: I have three kids and if I need to hide from them, I play online chess.

Holmes: I read a lot, both non-fiction and some more nonsensical stuff.

The younger generation are supposed to be the ones with ‘diamond hands’ who can hold on for dear life, something known as ‘hodl’ on popular social media platforms such as Reddit.

These phrases became popular around the time of the GameStop saga in early 2021, when investors pumped up the price of the beaten-up games retailer in an effort to squeeze short sellers.

Both describe people who are willing to hold their nerve and remain invested even when times get tough and are associated with the younger generation, who tend to have more of a propensity to trade and take risks than their older counterparts. But despite the big talk, younger investors are not walking the walk.

More than half of retail investors pulled back from markets between February and the end of April 2025 – when markets were choppy – with younger investors the most jittery, research from Charles Stanley found this week.

Some 65% of millennial and gen Z upped their cash in the three months, compared to 44% of gen X and 31% of baby boomers.

While young people believe they have the stomach for trading, the evidence suggests they do not. In fact, the older generations are the true proponents of staying the course.

This research was followed up by a report from investment trust Alliance-Witan, which found almost a quarter of investors had sold out of an investment at a loss over the past year, and one in 10 had done so over the past six months.

Most cited investment performance, while others said they needed cash for an emergency or life event. More than one in 10, meanwhile, admitted they based their decision on advice given to them by a friend or relative.

While selling at a loss can sometimes be unavoidable (and investors do need to accept making mistakes and selling out when they no longer believe in a company), making knee-jerk decisions based on short-term market volatility is a surefire way to lose money.

As Mark Atkinson, senior director, client management at WTW (Willis Towers Watson), said: “With so much uncertainty within the markets today, with tariffs and increased costs impacting organisations across the globe, it’s natural that an investor may be spooked.”

However, there are numerous studies out there that prove staying the course and remaining invested is the best way to make money over the long term.

The younger generation and the commenters over on Reddit have something right – at times it is better to ‘hodl’ and have ‘diamond hands’ in the face of uncertainty. So long as it is based on sound investing rationale and not the meme stocks and buzz companies that these terms were thought up for.

There are five funds in the IA UK All Companies, IA UK Equity Income and IA UK Smaller Companies sectors that have generated top-quartile Sharpe ratios for most of the past decade, according to Trustnet research.

The Sharpe ratio evaluates how much return an investment generates relative to the risk it takes by comparing its return above the risk-free rate to its volatility. A higher Sharpe ratio means the investment has delivered more return for each unit of risk, making it a valuable measure of performance efficiency.

In this series, Trustnet examines the Sharpe ratios of funds over the past 10 years to identify those that have ranked in their sector’s top quartile for six or more of those years on this key risk-adjusted return measure.

Source: FE Analytics. Total return in sterling between 1 Jan 2025 and 31 Dec 2024.

When it comes to the IA UK All Companies, IA UK Equity Income and IA UK Smaller Companies sectors, there are 266 funds with track records spanning 10 years but only five funds have posted first-quartile Sharpe ratios in six or more of them.

As can be seen in the above, Artemis UK Smaller Companies came in first place – it is the only UK equity fund that has been in the top quartile of its sector in seven of the past 10 years. It also made a 124.8% total return over this period, which is the eighth highest return of all UK equity funds.

Mark Niznik has run the fund since 2007 with William Tamworth joining him as co-manager in 2016. The managers invest in undervalued companies with predictable, growing cashflows and follow a three-pillared approach that looks at firms’ positions in their industries, financials and valuations.

Analysts with Rayner Spencer Mills Research said: “The fund has developed its strong track record over a variety of market conditions. Performance over discrete periods tends to be strong but not spectacular, but builds over time to produce strong returns.

“The value bias within the fund is likely to lag in markets where momentum is building to a point where it ignores fundamentals – such conditions are likely to be short term in nature and the fund usually does well in the correction that follows. The focus on valuation, self-funded growth, and the predictability of future cashflows represents a cautious approach and avoids speculative growth situations that risk disappointment.”

Performance of Artemis UK Smaller Companies vs sector between 1 Jan 2015 and 31 Dec 2024

Source: FE Analytics. Total return in sterling between 1 Jan 2015 and 31 Dec 2024

The other four UK equity funds on the shortlist have been in their sectors’ first quartiles for Sharpe ratio in six of the 10 years examined in this research.

Of these, Liontrust UK Smaller Companies made the highest total return with a 140.2% gain over the decade. It is managed by Anthony Cross, Alex Wedge, Matthew Tonge, Natalie Bell and Victoria Stevens.

It follows Liontrust’s Economic Advantage investment process, identifying UK companies with durable competitive advantages, particularly those underpinned by intangible assets such as intellectual property, strong distribution networks and recurring business. The process emphasises rigorous qualitative analysis, seeking businesses with high barriers to entry and capable management teams to deliver sustainable long-term returns.

Analysts at Square Mile Investment Consulting & Research said: “The investment approach is very well considered and clearly defined, which steers the team towards relatively steady businesses that are gradually growing and generating high levels of cash.

“The emphasis here is very much on a firm's intangible strengths, which by their very nature are difficult to assess using more traditional analytical techniques and therefore are often overlooked by many market participants.”

Man Income, which was the only constituent of the IA UK Equity Income sector to be top quartile for Sharpe ratio in six years and made a 123.1% total return over the decade, is managed by Henry Dixon. He seeks out both undervalued companies whose share prices are at distressed levels and more stable companies that have notably strong balance sheets and greater potential to grow their dividends.

FE Investments analysts said the fund’s outperformance stems from strong stock selection and income generation. They added: “[Dixon] is very disciplined in his approach, which has meant that, despite being often out of favour, he has generated strong capital appreciation, as well as delivering high levels of income.”

Ken Wotton’s WS Gresham House UK Micro Cap fund is another that FE Investments analysts praised for strong stock selection, highlighting its “notable outperformance” in 2015, 2017 and 2018, along with a record of protecting capital in challenging markets. It is up 106% over the 10 years we examined, with six of those years in the top quartile for Sharpe ratio among its IA UK Smaller Companies peers.

The analysts said Wotton’s thorough research process, which comes from his time at private equity firm Livingbridge, and extensive network of industry contacts is a strength when investing at the smallest end of the UK market.

Lastly, from the IA UK All Companies sector, JOHCM UK Dynamic is the final fund to make the shortlist, returning 96.6% over the decade to the end of 2024 with a track record of six years sat in the top quartile of its sector for Sharpe ratio. The process behind the fund looks for “business transformation opportunities”, arguing that companies are dynamic and not static.

It’s worth noting that the majority of this track record was built under Alex Savvides, as Vishal Bhatia, Tom Matthews and Mark Costar took over the fund in 2024 after Savvides’ departure. Bhatia and Costar had worked closely with the UK Dynamic team since its inception in 2008, while Matthews spent eight years as the fund’s senior analyst.

The UK economy faces a uniquely difficult outlook, combining low growth with stubborn inflation, according to Michael Matthews, FE fundinfo Alpha Manager of the Invesco Sterling Bond fund. “The UK has the worst of both worlds,” he said. “It’s got stagnant, low growth, but a high-inflation dynamic.”

Matthews, who has long held a bearish view on the UK, acknowledged that he had underestimated the market’s resilience so far. UK fixed income has performed better than expected, as yields rose to attractive levels and spreads remained tight despite persistent macro uncertainty. But while hard data has remained supportive, soft indicators are starting to wobble.

“The outlook is so uncertain. The UK was looking like it would be better this year when growth started to pick up, but those bets are off the cart,” he said.

His stance remains more cautious than that of many investors. “Generally, people are more optimistic on the UK than I am,” he said. This is especially true for equity managers, as UK equity markets are “now looking a bit more attractive than the US”.

In bond markets, however, the story is more nuanced, with the manager particularly concerned about US tariffs, the limited impact from recent tax changes and broader political risk.

“Supply chain issues are the big known unknowns,” he said. “Every day you’re waking up to see what the new headline is, to see whether they’re going to be brought back, extended, reversed. It’s really hard to model their impact.”

He warned that geopolitical shocks could undo the UK’s recent advantages, such as lower energy prices and a stronger pound. “If there’s a big geopolitical event, that could offset these benefits,” he said. “[A potential conflict between] China and Taiwan is something we often talk about in internal meetings”.

However, domestic risks are even greater because of the UK’s “challenged” fiscal situation. “The government might try to reverse some of the cuts introduced with the Budget to improve its popularity but given the challenged fiscal situation that could be tricky”.

That said, the UK still represents more than half (54%) of his £909.8m portfolio. After a positive 2023, when the fund was the eighth-best strategy in the IA Sterling Strategic Bond sector, relative performance has slumped to the bottom quartile of its peers over the 2024 and 2025 so far.

Performance of fund against index and sector over the year to date

Source: FE Analytics

To turn things around, Matthews is remaining defensive on credit, arguing that overall yields are attractive but spreads have become uncomfortably tight.

Instead he is looking where others are not. In particular, he is finding opportunities at the long end of the curve and has started to buy long-duration gilts. “Gilts do look attractive, but everyone hates the long end of all markets at the moment”.

On credit, yields remain “attractive”, but with sterling spreads at 90 basis points the prices are still unjustified.

“Given the amount of uncertainty out there, we didn’t think the spreads were getting to a point where they were screamingly cheap. Fundamentals are supportive. Technicals are super strong. The valuations are a bit rich,” he noted.

Sterling investment grade does continue to offer value, however. “The shape of the UK yield curve is giving us 5.5% to 6% yields without really taking too much credit risk, so we don’t need to extend that much.”

His focus on yields has led him to cut exposure to the AT1 market (Additional Tier 1, or bonds issued by banks that pay high interest but can be written off or turned into shares if the bank’s finances weaken) and he has brought down his corporate hybrids “pretty much to zero”, because he can get the same yields in a senior credit without too much credit risk.

In terms of sector positioning, Matthews isn’t taking strong views. “There’s no sector that’s really challenged,” he said. “The auto sector is topical, given the tariffs, but it didn’t really create any more cheapness there than it did in any other sector.”

The main issuers in the Invesco Sterling Bond portfolio are BP (2.2%), Lloyds (2%), Santander (1.9%). The overall duration is 6.4 years.

Value investing is a tried and tested investment strategy that has about one hundred years of history. At its core, it is a search for value: finding securities that are trading at a substantial discount to the intrinsic value of the underlying business.

Despite its long history, the effectiveness of value investing is influenced by a much more recent invention – passive investment products, such as exchange-traded funds (ETFs), which typically allocate money to indices according to the weight of their components.

Passive investing has grown very significantly over the past 20 years and now accounts for more than 50% of total equity investing in mutual funds and ETFs globally today.

Some of the largest index-tracking ETFs are now very big indeed. For instance, the SPDR S&P 500 ETF Trust has assets of $561.7bn, the iShares Core S&P 500 ETF has assets of $548.6bn and the Vanguard 500 Index Fund (VOO) has assets of $622.1bn.

There are a wide range of possible explanations for the popularity of passive investing. Low fees and diversified exposure are commonly cited. The long-term performance of major US indices is another attraction. But one thing that passive investors typically ignore is the valuations of the underlying assets.

We can say that passive investors are largely ‘value agnostic’. The sheer scale of the passive strategies means that value investors occupy a much smaller section of the market than they did in the past. 

Passive investing makes up 43% of global equity mutual funds and ETFs

Source: Redwheel, April 2025. US dollars. Calculated using monthly total net assets of passive funds as a percentage of the Morningstar Global universe of mutual funds and ETFs, excluding money market funds and fund of funds.

Why do passive strategies increase market distortions? Put very simply: as the market share of participants who care about fundamentals and valuations shrinks and is replaced by investors who are indifferent to valuation, mispricing becomes a more common characteristic of the market.

Here is a more detailed explanation. Active managers, particularly those who employ a value-driven approach, are typically underweight the more expensive mega-cap stocks and overweight smaller but cheaper stocks.  As they receive redemptions, these stocks are sold, and the passive managers allocate a greater proportion of the money they receive to larger, more expensive stocks.

The chart below highlights the huge disparity in funds flowing into passive strategies compared to active strategies. While new money, such as pension contributions, can account for some of this, the magnitude of the disparity suggests that considerable sums are shifting from active to passive funds.

Passive flows are increasing while active flows are stagnating

Source: Redwheel, April 2025. Cumulative fund flows in US dollars from January 2012. Morningstar Global universe of mutual funds and ETFs, excluding money market funds and fund of funds.

This impact is exacerbated by the fact that liquidity does not scale in a linear fashion with market capitalisation. For example, Apple’s market cap is 187 times larger than Clorox but the difference in average daily traded volumes is only 35 times.

This means that as money flows into passive funds not only is more money being allocated to Apple than Clorox but each dollar will have a price impact that is greater than the differential in market cap.

Passive has, in essence, become a giant momentum strategy. This undoubtedly has contributed to the highly distorted nature of the US stock market, whereby seven very large companies have just got bigger and bigger until they eventually make up almost a third of the index.

The fact that most passive funds buy more larger companies creates a reinforcing positive feedback loop: as companies get more expensive – and thus larger – the passive index buys more of them with each incremental dollar invested, further driving up the price, the company size, and the weight in the index, in a huge loop that rewards size and overvaluation.

The Magnificent Seven as percentage of S&P 500 index

Source: Bloomberg, Redwheel, 31 March 2025.

Much of the growth in passive investing has been driven by consistent inflows from working-age savers, primarily through pension contributions. As populations in developed markets age, the number of retirees drawing down from their investments could soon outweigh those making regular contributions.

That would reverse the net flows into passive funds and prompt a very different market reaction. If this occurs, who will step in to buy? With the active management industry shrinking and fewer investors willing to pick up bargains, markets could gap down with no natural buyers to provide support. This represents a dramatic shift from the 'passive era' where rising tides lifted all boats.

By contrast, active managers –particularly value-oriented ones – are well-positioned to allocate capital where the market is underpricing risk or overlooking opportunities. They can exploit valuation anomalies created by price-insensitive investors.

This isn’t a call to abandon passive investing, but a reminder that ignoring valuation carries risks. As we enter a new market cycle potentially influenced by inflation, higher interest rates and slower economic growth, the easy wins of the past decade may not repeat.

In this environment, valuation matters again. Retail investors and their advisers can reduce downside risk and capture long-term opportunities by focusing on fundamentals and adopting a more selective approach. While valuation may no longer matter to everyone, it should still matter to you.

Ian Lance is a partner and fund manager in the Redwheel Value & Income team. The views expressed above should not be taken as investment advice.

The IA North America peer group is the regional fund sector where the most funds have consistently made their sector’s highest Sharpe ratios, Trustnet research has found.

The Sharpe ratio evaluates how much excess return an investment generates relative to the amount of risk it takes, using standard deviation as the measure of risk. A higher Sharpe ratio reflects better risk-adjusted performance, making it a key metric for assessing investment efficiency.

In this series, Trustnet is reviewing funds' Sharpe ratios over the past 10 years to highlight those that have placed in their sector’s top quartile for at least six of those years using this prominent risk-return measure.

This time, we’re looking at the various regional sectors in the Investment Association universe: IA Asia Pacific Excluding Japan, IA Asia Pacific Including Japan, IA China/Greater China, IA Europe Excluding UK, IA Europe Including UK, IA European Smaller Companies, IA India/Indian Subcontinent, IA Japan, IA Latin America, IA North America and IA North American Smaller Companies.

Source: FE Analytics. Total return in sterling between 1 Jan 2025 and 31 Dec 2024.

Across these 11 sectors (home to 536 funds with a long enough track record), 18 funds made the shortlist in this research – four of which are in the top quartile for Sharpe ratio in seven of the 10 years and 14 achieved it in six years.

Half of these funds above reside in the IA North America sector. For much of the past decade, investors could generate high returns in the US market through a narrow band of stocks: growth investing has been in favour for the bulk of the period, especially US tech stocks such as the FAANGs and, more recently, the Magnificent Seven.

The table is ranked by the number of years in the top quartile for Sharpe ratio first, then by the total return over the 10 years to the end of 2024. Alger American Asset Growth sits at the top, thanks to seven years of top-quartile Sharpe ratios and a return of 404.9% (versus 242.4% from the average IA North America fund).

Managed by Patrick Kelly, Ankur Crawford and Dan C. Chung, the fund looks for companies undergoing ‘positive dynamic change’. This means searching out businesses benefiting from high unit volume growth (rapidly growing demand, strong business models and market dominance) alongside positive life cycle change (new management, product innovation, M&A or restructuring, and/or regulatory change).

At the moment, the fund is overweight the information technology, communication services and consumer discretionary sectors with Microsoft, Nvidia, Amazon and Meta Platforms its top holdings.

Performance of Alger American Asset Growth and Janus Henderson US Forty vs sector between 1 Jan 2015 and 31 Dec 2024

Source: FE Analytics. Total return in sterling between 1 Jan 2025 and 31 Dec 2024.

Janus Henderson US Forty is in second place with seven years of top-quartile Sharpe ratios and a 377.7% total return. This is managed by Nick Schommer and Brian Recht, who invest at least 80% of the portfolio in 20 to 40 of their best US large-cap growth ideas.

It is currently underweight the information technology sector, although many of its top 10 holdings fit into this theme, including Microsoft, Amazon, Nvidia, Meta Platforms, Broadcom, Apple, Alphabet and Oracle.

GS India Equity Portfolio has also posted top-quartile Sharpe ratios in seven of the past 10 full calendar years, returning 260.8% over the entire period.

Manager Hiren Dasani is a bottom-up investor who focuses on small- and mid-caps while looking for a combination of good businesses and good valuations; he will not invest in a company if it is not a ‘good business', regardless of its size in the index.

The final fund to make a top-quartile Sharpe ratio in seven of the years we examined is WS Morant Wright Nippon Yield. It made a 196% total return in this time.

Investment boutique Morant Wright focuses exclusively on Japanese equities and the team behind the fund looks for companies that generate strong cashflows, with strong balance sheets and underappreciated assets. It also has a value approach, which limits valuation risk, and leads to underweights towards sectors such as information technology, healthcare and consumer staples.

Among the regional equity funds with six years in the first quartile for Sharpe ratio, some – such as Invesco EQQQ Nasdaq 100 UCITS ETF, iShares NASDAQ 100 UCITS ETF and T. Rowe Price US Large Cap Growth Equity – have made higher total returns than the above funds.

These funds are more focused in their approaches, for example focusing on the Nasdaq. This means they have benefited more directly from the strong gains in these segments of the market, leading to higher returns, but are more exposed to sector-specific volatility.

Finsbury Growth & Income made 4.2% on a share-price-total-return basis over the six months to the end of March, according to the trust’s half-year results, leaving manager Nick Train to ask why his performance has not improved as he would have hoped.

Half of this return has come from the share price, with the underlying net asset value (NAV) up 2.4% in the six months under review. The FTSE All-Share Index rose by 4.1% over the same period.

“I look at the trust’s portfolio and I think – here is a collection of outstanding, predominantly global, companies, with obvious growth opportunities. Then I look at our NAV performance and wonder why it isn’t better,” said Train.

This could be a buying opportunity, he admitted, noting: “Then I think to myself ‘I should probably buy some more shares for myself’.”

Performance of trust vs sector and benchmark over 6 months to end of March

Source: FE Analytics

He addressed concerns over US president Donald Trump's tariffs, which Finsbury Growth & Income chair Pars Purewal noted was a “threat” and something that the board would monitor closely moving forward.

Train said: “It is not clear that tariffs matter at all for major portfolio holdings, such as RELX, London Stock Exchange Group or Experian, because their products are digital, not physical.

“Moreover, the subscription-type revenues earned by that trio and other important holdings, such as Rightmove and Sage, are reassuringly predictable.”

However, he highlighted two large holdings that make products sold globally – Unilever and Diageo – which combine for more than 20% portfolio.

“Unilever has recently been able to reassure investors that its exposure to any permanent US-imposed tariffs is relatively modest. Only 20% of Unilever’s revenues are derived from the US and a proportion of those are manufactured there and therefore not subject to tariffs,” he said.

“For Diageo, the situation is, ostensibly, less reassuring,” he conceded as the company derives half of its profits from the US.

“It has the misfortune that two of its most important and popular products there are Mexican tequila and Canadian whiskey, both now at risk of tariff imposition,” Train noted, but said he was looking to add to the company rather than sell.

There are two reasons for this. First, Train believes tariffs will eventually be repealed or will become less effective.

Second, big tax cuts for US citizens could improve the prospect of a booming domestic economy, which would be a net benefit for the firm.

The manager also highlighted two new holdings in the trust: Clarkson and Intertek. These were bought following the sale of Hargreaves Lansdown to private equity in April.

“They are both service, not manufacturing, companies – in ship-broking and testing and assurance. Both are the best or amongst the best at what they do in the world. In other words, they contradict the narrative that the London stock market lacks world-class companies,” he said.

The FE fundinfo Alpha Manager has changed up his portfolio since 2020, including a “marked increase” in the trust’s exposure to UK companies that sell software services or data analytics tools.

While this has “not yet produced the sustained improvement in investment performance that all shareholders want to see”, he said the portfolio is now “better prepared to withstand the effects of tariffs and possible trade wars than it otherwise would have been”.

Overall, he concluded: “I do hope all shareholders will be rewarded for their patience, including me.”

Markets are set for continued chaos after the US Court of International Trade ruled this week that the president’s emergency powers do not give him unilateral authority to impose his sweeping ‘Liberation Day’ tariffs.

Trump had used the International Emergency Economic Powers Act (IEEPA) to drive through his tariffs, but Lale Akoner, global market analyst at eToro, said this is “legally untested and is now coming under increased scrutiny”.

AJ Bell investment director Russ Mould said it was a “seismic development” that has “generated some hope in the market that the tariff threat might be wiped away with its latest ruling”.

However, most experts agreed that the latest news on Trump’s tariffs has left more questions than answers.

To start, the decision will be appealed by the Trump Administration, with Akoner suggesting the federal appeals court is likely to take a more favourable view than the US Court of International Trade.

Even if unsuccessful, the US government has other ways to push through its tariff agenda, including the Balance of Payments Act (Section 122), the Tariff Act of 1930 (Section 338), or initiating Section 301 investigations to reintroduce tariffs under an alternative legal framework, she said.

Iain Barnes, chief investment officer of Netwealth, said the news “does little to reduce uncertainty around the direction of the global economy”.

“It’s increasingly clear that there is not going to be a steady end point on the structure, magnitude and breadth of tariffs and therefore overall trade policy, making it ever harder for chief executives to plan long-term decisions on their supply chains and customer bases.”

Bond markets may look favourably on the news, as it could give the US economy a “much-needed” confidence boost and extend rate cuts further into the future.

However, he still expects “passive diversification away from US assets” over the medium term.

Mould agreed that doubt remains, suggesting the latest development could “prolong uncertainty” even if it results in a better outcome for markets overall.

“It also exacerbates the issue of how the big tax cuts being brought forward in the US will be funded – given revenue from tariffs was supposed to help on this front,” he noted.

Not all were as pessimistic, however. George Lagarias, chief economist at Forvis Mazars, said he expected a positive reaction from markets and businesses.

“At the very least, the ruling paves the way to dent some of the sharp economic impact of tariffs and give businesses further time to prepare. It could also help with retail sales, reducing crisis-level consumer pessimism especially in the US,” he said.

Value investing has been the way for investors to lose less money so far in 2025, but over the past decade picking growth stocks has been the clear winner.

This year, the MSCI World Value index has lost 1.1% in sterling terms, beating the MSCI World Growth index (down 4.1%). It comes on the back of two straight years where growth stocks were the clear winners and on the back of a decade where value has been the inferior investment strategy.

While some think value investing has emerged from its slumber, others are less convinced and believe growth is still the best way for investors over the long term.

FE fundinfo Alpha Manager Gerrit Smit said that despite recent poor performance “growth as an investment style can be trusted to continue delivering the best result.”

Ben Seager-Scott, chief investment officer at Forvis Mazars, added: “Growth investing has performed well for years and, while there have been challenges more recently, there are still markets where growth looks very appealing”.

Having previously highlighted the experts’ favourite value funds, here Trustnet asks fund pickers for their favourite growth portfolios, covering technology specialists, global markets, the US and Japan.

Charlie McCann, investment analyst at Square Mile, favoured the Rathbones Global Opportunities fund as a growth play.

Led by Alpha Manager James Thomson, the fund aims to find “under-the-radar growth opportunities with high barriers to entry”. These are disruptive and durable companies with pricing power and a “history of under-promising and overdelivering”, which should be able to provide sustained growth even in difficult conditions.

McCann praised it for a well-diversified approach, with the managers refusing to allocate more than 4% to any single stock. While it owns the likes of Nvidia, this lower allocation towards the mega-cap technology names has been a tailwind this year, with the fund down just 1.5% over the past six months, compared to a sector average drop of 4.3%.

Although the fund can prove volatile in the short term, the strategy will reward investors over longer timeframes, making it a strong option for growth investors, he said. Indeed, over the past decade, the fund is up 224.7%, the 10th best result in the IA Global sector.

Performance of the fund over the past 10yrs

Source: FE Analytics

Another option for investors aiming to double down on growth is the T.Rowe Price US Large Cap Growth Equity fund, which Seager-Scott described as a “star of growth investing”.

The strategy is more than just a “momentum play” because the managers buy companies that can attempt to grow their bottom line and justify stretched US valuations rather than just “buying whatever is currently doing well”.

While the portfolio does hold six of the Magnificent Seven (Apple, Nvidia, Microsoft, Amazon, Alphabet and Meta), it also maintains exposure to other tech businesses, such as Visa and Mastercard, that can grow over the long term.

This fund has delivered top-quartile results in the past one, three and five years versus its IA North American peers, and since the manager took over in 2017 it is up 250.7%, nearly double the sector average.

Performance of the fund since manager start

Source: FE Analytics

For thematic investors, Daniel Lockyer, senior fund manager at Hawksmoor Fund Managers, said the technology wave that has dominated markets over the past several years still has more to run and highlighted William De Gale’s Bluebox Global Technology fund as his preferred choice.

Over the past five years, the fund has surged 117% compared to a sector average of 57.2% while holding just two members of the Magnificent Seven, Apple and Nvidia.   

Performance of the fund vs the sector over the past 5yrs

Source: FE Analytics

Instead of favouring the typical US mega-cap tech companies, the fund focuses on “enablers of technology” who provide the components of the wider supply chain. For example, the manufacturing company Applied Materials, which provides the equipment for the creation of semiconductors, is the fund’s third largest holding.

De Gale firmly believes these tech companies could sustain annual earnings growth of 15%, which would “mitigate any short-term concerns over valuations or [Donald] Trump tariffs,” said Lockyer.

There are growth opportunities outside of the more traditional markets as well. While many investors will point to the US, the tech sector and the global market as happy hunting grounds for these specialists, James Goodrich, fund manager at JM Finn, pointed to the JP Morgan Japanese Trust as an interesting growth strategy.

Japan has generally underperformed traditional growth markets such as the S&P 500 but is home to some of the most technologically advanced businesses in the world. As such, while a Japanese trust “may seem odd at first glance”, there is a “great opportunity for growth in Japan", he said.

Additionally, having underperformed other growth markets for decades, valuations in Japan are incredibly low, while healthier levels of inflation, increasing interest rates and wage growth, suggests the country is poised for a period of more sustained growth, Goodrich added.

Performance of the trust vs the sector and benchmark over 10yrs

Source: FE Analytics

The JP Morgan Asset Management investment trust could be a good way to get exposure to this theme, with the trust posting the best performance in the sector over the past year. Over the past 10 years it is up 136%, another top-quartile performance within the sector.