After a long bull run, India’s valuations began cooling off in the fourth quarter of last year then spiralled downwards in the first quarter of 2025.

An unlikely hero subsequently emerged to propel the Indian stock market back into an upward trajectory: Donald Trump. By kyboshing global trade and taking a knife to both the dollar and international stock markets, he almost single-handedly drove investors back into the arms of Indian equities.

India’s premium valuations, which investors had been questioning as excessive, seem worth paying after all for a structural growth story somewhat insulated from the vagaries of global trade and US tariffs, said Ewan Thompson, who runs Liontrust Asset Management’s India and emerging markets funds.

The plot thickened at the start of this week when China and the US climbed down from their escalating tariff spat, a development that lessens India’s relative appeal as a domestically driven economy relatively insulated from trade wars.

The MSCI India index is more or less flat over 12 months in sterling terms but that figure disguises a lot of volatility. For example, this year “India basically had a terrible two months and a really great two months and that washes out somewhere in the middle”, Thompson observed.

India vs China, emerging markets and global equities over 1yr

Source: FE Analytics

“What’s changed between those two periods has been the global perception of what tariffs are going to mean. India’s behaved in a counter-cyclical way so it was doing badly when everything else was okay and then it did extremely well when everything took a hit. That probably shows you the degree to which India is being perceived in the market as a more defensive place to be.”

What drove India’s sell-off?

In late 2024 and early 2025, India was hit by three things: a spike in food inflation; a budget in which the government curtailed its capital expenditure to single digits; and high valuations. India was on a 90% premium relative to the rest of Asia, said Kunal Desai, portfolio manager at GIB Asset Management.

“These three elements came together and created a 25-30% fall, particularly in the Indian mid-cap space, which had been the winner over the past two to three years, but that was really a healthy correction.”

In India, people spend a large amount of their disposable income on food and groceries so food inflation has been a significant issue, added Chetan Sehgal, manager of the Templeton Emerging Markets Investment Trust (TEMIT).

Investors are also concerned about whether artificial intelligence will erode demand for India’s IT services sector.

Waning enthusiasm for India coincided with China’s resurgence which attracted some capital flows, he added.

Mike Sell, head of global emerging market equities at Alquity, said “India is all about growth” and it just had a “growth scare”.

India’s weak quarterly GDP growth of 5.6% for the three months between July and September 2024 “scared people” because it was much lower than the growth rate of 6-7% or higher that investors had become used to seeing from India. However, he said the disappointing quarter was a “blip” and expects India’s economy to strengthen.

Buying the dip

GIB Asset Management increased the India exposure within its GIB AM Emerging Markets Active Engagement fund during late April and early May – buying the dip – and Desai plans to continue adding to India over the next six months.

“India is a market which moves from irrational exuberance towards excessive pessimism. It always has. And taking advantage of those periods of excessive pessimism, for us, makes perfect sense,” he explained.

TEMIT also took advantage of the recent sell-off, having previously been underweight India, according to Sehgal.

“With the correction of the Indian equity market, we have been able to seize opportunities both ways. While we have trimmed our positions in companies that have exhibited strong share price performance, for instance in Indian banks, we have also been able to relook at some companies,” he said.

“The valuation gap has narrowed and now we can get reasonable quality Indian companies at a reasonable price.”

What do fund managers expect going forward?

Despite a rocky few months, fund managers remain confident in India’s long-term prospects.

Gabriel Sacks, manager of abrdn Asia Focus, said: “As one of the largest and fastest-growing economies globally we think India remains one of the most attractive places to invest taking a long-term view and tariffs should help direct incremental investment to India at the expense of many of its peers in the region.

“The country is still well-placed geopolitically in a post ‘Liberation Day’ world and falling oil prices will help supress any pressure on the current account deficit and inflation expectations.”

India is Alquity’s largest active overweight within its Asia fund because it provides a much higher return on equity than other markets. India’s young, growing population is a long-term tailwind and Sell expects tax cuts this year to boost consumer spending. He has been gaining exposure to the Indian consumer by investing in retail, property, travel and leisure, for instance through a hotel chain.

Meanwhile, Desai believes India appeals for two main, interrelated reasons – strong domestic growth and insulation from trade wars.

India has the strongest GDP growth rate across the major emerging economies and benefits from a deep, integrated domestic market. And it is not dependent on exports; in fact, India’s exports to the US represent 2.3% of GDP – compared to 28% for Mexico and 15% for Taiwan, he said.

Additionally, people in India are moving their savings away from physical goods and into financial assets, tilting towards domestic equities. As a result, India’s stock market is “very dependent on domestic savings, which are far more structural and consistent, rather than foreign equity ownership, which pivots depending on the market news flow”, Desai said.

“Even though India traditionally has been seen as a risk-on, risk-off market, its stability is significantly higher because it is the domestic equity investor who’s really protecting the market from various gyrations that you see globally.”

Corporate fundamentals are also improving and companies are showing a higher degree of balance sheet restraint. Operating leverage should come through as a result, creating an attractive free cashflow profile going forward, he said.

In the wake of growing geopolitical instability, the investment community is facing a critical question: can defence be compatible with environmental, social and governance (ESG) principles?

Traditionally viewed as ethically incompatible with sustainability goals, defence investments, particularly in weapons manufacturing, have long been excluded from ESG and sustainable portfolios.

Yet the regulatory and political landscape is shifting and, with it, the stance of some investors.

The regulatory distinction

At the heart of the debate lies a key distinction. Controversial weapons – including nuclear, chemical, and biological arms, landmines, and cluster munitions – are banned under international treaties and widely excluded from ESG strategies due to legal, ethical, and reputational concerns.

In contrast, conventional weapons such as tanks, firearms, and aircraft are not prohibited and are often seen through a different lens, though they pose ethical and reputational risks, especially when sold to conflict zones.

The Sustainable Finance Disclosure Regulation (SFDR) regulation in the EU requires ESG funds to disclose their exposure to controversial weapons (Principal Adverse Impact Indicator 14), but it leaves room for interpretation when it comes to conventional defence, as the related Principal Adverse Impact (PAI) on conventional weapons remains optional for investors to disclose.

Our own data shows that 28% of ESG funds analysed are invested in conventional defence companies. This includes 18% of Article 8 funds and 1% of Article 9 funds, while the remaining 9% comprises Article 6 or non-classified funds.

In the UK, the figure is even higher, with 32% of UK-based ESG funds that we rate showing exposure to the sector.

These findings highlight that while outright exclusions remain common, a growing number of ESG strategies are beginning to re-engage with the defence sector – albeit cautiously.

Regulatory ambiguity and the role of DNSH

One of the key challenges for ESG funds navigating regulatory frameworks like the SFDR and the EU Taxonomy is the application of the "Do No Significant Harm" (DNSH) principle.

Defence activities are excluded from the EU Taxonomy, which defines what qualifies as environmentally sustainable. This exclusion is not necessarily a judgment on the sector’s environmental harm but rather a result of its absence from official sustainability classifications.

In this case, since defence is not considered as an environmentally sustainable activity, the DNSH principle is not applicable. However, the DNSH principle under the SFDR is broader and applies at the company level.

This broader application leaves room for interpretation, which can lead to inconsistencies. Some investors apply DNSH narrowly, excluding only companies involved in controversial weapons, while others adopt a stricter approach, excluding firms involved in any type of controversy – even in the absence of formal breaches.

As a result, Article 9 funds, which must pursue sustainability as their core objective, are generally unable to invest in defence stocks. Article 8 funds, which promote environmental or social characteristics, have more flexibility but still face constraints due to reputational risks and diverging interpretations of ESG compliance.

ESG ≠ Ethical investing

One of the most important clarifications for the defence issue is the distinction between ESG integration and ethical investing.

ESG is about assessing and estimating risks across all industries. It is not, by default, an ethical judgement. Exclusions are often a policy choice or a response to regulation, rather than a reflection of ESG incompatibility.

This misunderstanding has contributed to a binary view of defence: either fully excluded or fully embraced. But the reality is more complex.

The sector includes not only arms manufacturers but also cybersecurity firms, logistics providers, and infrastructure companies – areas that could potentially meet ESG criteria with greater regulatory clarity.

A more nuanced framework

Calls are growing for a more pragmatic approach. Industry leaders have proposed solutions like ‘defence bonds’ – debt instruments linked to responsible defence activities – to create pathways for aligning security-related investments with sustainability objectives.

Other investors, such as Alliance IG have changed their policies to be able to invest in nuclear weapons and conventional weapons for their Article 8 funds.

At the same time, policymakers in countries such as Finland, Lithuania and Poland are revisiting long-held exclusions and beginning to promote defence investments as essential to national and regional security.

This raises a key point: security is a pillar of sustainability. Without peace and stability, environmental and social objectives cannot be achieved. Yet, however justified these shifts may be in the current geopolitical context, it remains true that weapons are ultimately designed to harm – highlighting the persistent ethical tension at the heart of these evolving investment strategies.

Time for clarity, not exclusion

Defence cannot – and should not – be labelled sustainable under the current EU Taxonomy. But not all defence-related activities are inherently at odds with ESG principles.

ESG data providers can play a crucial role in helping investors assess company exposure to both controversial and conventional weapons, flag controversies and evaluate overall ESG performance.

Such assessments help asset managers navigate the grey zones between exclusion and engagement, especially where regulation is ambiguous.

However, the financial services industry must push for regulatory clarity, not just compliance. Clearer definitions differentiated treatment of defence-related activities, and practical disclosure guidelines are essential for aligning responsible investing with real-world security challenges.

Because in today’s world, sustainable investing must not ignore the importance of safety and resilience.

Aliénor Legendre is an ESG research associate at MainStreet Partners. The views expressed above should not be taken as investment advice.

Media debates about the underperformance of environmental, social, and governance (ESG) strategies miss the point entirely and reflect the confusion that still abounds in the space, according to Sonja Laud, chief investment officer at Legal & General Investment Management.

Investors who turn to ESG funds hoping to do good with their money also misunderstand what the label is actually all about. As Laud put it: “To be very blunt, we're not here to save the world. Asset managers are here to deliver credible investment solutions.”

ESG strategies have come under fire from several sides – politicians have pulled investments over perceived ideological bias, major asset managers (such as BlackRock and Vanguard) have scaled back their ESG efforts and some investors have felt misled by funds that marketed themselves as ESG while holding assets that seemed in contrast with their premise.

It’s no surprise that many of these portfolios disappointed recently, due to both a lack of market momentum and the underperformance of the growth investing style that many tend to follow.

For example, Fundsmith Stewardship – the “sustainable” counterpart to the flagship Fundsmith Equity fund – has trailed its sibling by 10 percentage points over the past three years, despite following the same strategy with a few additional exclusions, as the chart below shows.

Performance of funds against sector over 3yrs

Source: FE Analytics

However, speaking of ESG underperformance in this context, and over this timeframe, may be misguided.

“There is not enough understanding of the fundamental risks that we are trying to integrate in our investment processes,” Laud said.

“The reason why we get very unfortunate headlines about the underperformance of ESG funds is because there is a genuine misunderstanding of the time horizon mismatch for when those risks will come to fruition, versus the short-termism of performance reports.”

According to her, we may now be moving past the initial wave of disillusionment, entering a new phase of debate around what ESG can and cannot achieve. In particular, Laud called for a “far healthier debate” centred on value creation.

“The integration of sustainability factors, particularly those that carry clear financial materiality, is a must-have for us to deliver against our fiduciary duty,” she said. “By bringing the debate back to the value creation aspect, you can very easily see why this is an integral part of your overall investment process.”

This is the reason why, at Legal & General, the stewardship team now sits within the investment team, Laud explained.

Regulation has been more of an obstacle than helpful. Instead of offering clarity, it has “added to the confusion” with fund classifications not always making it clear which strategies fall into which categories.

“Hopefully, we have an opportunity here too, to make sure that the end consumer of those funds can understand what we're doing.”

Finally, on the politics of ESG, Laud said US president Donald Trump and others who share his views that the investment process is untenable will struggle to dismiss ESG if it’s presented within a framework that centres on value creation. She stated: “If we show ESG factors as a value-enhancing opportunity, no one in the US will push back.

“To get there, we need clarity of thought around what we’re doing. The time horizon mismatch will never align unless we can clearly demonstrate our reasoning and the ESG assumptions underpinning the companies in our portfolios.”

That company-level relevance is crucial, she added, because systemic risks eventually become idiosyncratic. Fundamentally, ESG is long-term risk management.

“Climate change, for example, is a risk that will manifest in highly specific ways depending on where a company operates or locates its production facilities. That’s the level of understanding we need to show – how we’ve constructively assessed that these risks, if managed well, could ultimately lead to better financial outcomes.”

We might be on the verge of a resurgence in small and mid-caps if the post-Liberation Day returns are anything to go by, according to asset managers.

The mid-cap FTSE 250 and small-cap Deutsche Numis Smaller Companies Excluding Investment Trusts indices have trounced the FTSE 100 since US president Donald Trump announced his sweeping punitive tariffs in early April.

This is a reversal from the past half a decade, with the average investor achieving better returns by tracking the FTSE 100 since 2020 than by going down the market capitalisation spectrum.

Alexandra Jackson, manager of the Rathbones UK Opportunities fund, attributed this to several factors. Mid- and small-caps are far more domestically driven, with around 50% of their revenue based in the UK compared to 30% of the FTSE 100.

As a result, domestic companies have suffered due to the poor macroeconomic environment of the past five years, which paired “downbeat and confusing messaging” from the government with a longer-than-expected interest rate-hiking cycle in 2022.  

However, since 2 April, the tides have turned, with the FTSE 100 up by 0.2% while the FTSE 250 and Deutsche Numis indices have surged by 8.3% and 6.7% respectively.

Performance of UK indices since 2 April

Source: FE Analytics

Below, managers discuss what is driving this recent rally and if it can be sustained over the long term.

Why have mid-caps bounced?

Firstly, experts pointed to the headwinds facing the FTSE 100, which has helped the FTSE 250 to outperform. Tim Lucas, manager of the BNY Mellon UK Equity portfolio, said fears of a recession in the US and broader market uncertainty are a crucial part of this.  

With US president Trump flip-flopping on tariffs and international relations, there is much uncertainty for companies that do a lot of business globally, such as the multi-national businesses that dominate the FTSE 100.

For example, businesses such as pharmaceutical giants AstraZeneca and GSK, which have around 40-50% of their revenue in the US, are still down since ‘Liberation Day’ despite a rally in the FTSE 100 over the past month.

Stock prices of UK equities since 2 April

Source: FE Analytics

Rebecca Maclean, manager of the Dunedin Income Growth Investment Trust, said UK mid-caps are comparatively cyclical and service-oriented, meaning they are less exposed to this uncertainty.  

“If you are an investor concerned about global trade and global GDP growth, there are a lot of opportunities in these more domestic businesses right now," she said.

Additionally, UK small and mid-caps are the cheapest part of an already discounted market. She explained the UK market is trading 20% below its historical average, with the FTSE 250 trading at a further 20% discount, making it very attractive to cost-conscious investors.

Alex Paget, fund of funds manager at VT Downing Fox, concluded that increasing uncertainty around Trump's approach, along with historically low valuations in mid-caps, has caused a shift in investors' priorities.

“We have no idea how the next few months will play out, but this general market reset could be what is needed for small and mid-caps to start doing well again," he added.

What still needs to happen?

However, Jackson warned that “one month is not enough” to conclude that we are on the verge of a resurgence in UK mid- and small-caps. Increased inflows into the UK would be essential for this rally to persist over the long term, she said.

The rise of passive investing has led to money pouring into the largest stocks, often away from mid- and small-cap names, she explained. As long as these remain “bereft of inflows”, a sustained rally will be difficult to achieve, she said

Andrew Jones, manager of Janus Henderson UK Responsible Income, added that the biggest challenge to a resurgence “is that consumers have no confidence in the home market".

The UK consumer is in a relatively strong position and has successfully “rebuilt their balance sheets” in recent years. With more in their pocket, people therefore have a higher ability to spend, which should benefit those companies linked to the domestic economy.

Unless unemployment rises materially, "which we do not expect", FTSE 250 businesses could benefit from a significant rise in domestic spending this year, contributing to further outperformance, he said.

However, this will not happen overnight and there will need to be significant evidence of this taking effect before investors start to come onboard.

“I think it will take a bit longer for it to come through, but this the start of a gradual evolution for the asset class.” He concluded.

Although the UK is a rich hunting ground for dividend-paying stocks, wealth managers have also found a wide range of international equity strategies for clients who want to receive regular income payouts.

From dividend-rich areas such as Europe, to tougher tasks like emerging markets and the US, Kamal Warraich, head of fund selection at Canaccord Wealth, and Edward Allen, private client investment director at Tyndall Investment Management, explain below how they are gaining exposure to dividend income in every market.

Europe: Attractive valuations and higher dividends

Valuations are relatively modest in Europe at present, which means that yields are higher than their historical average, Warraich said.

He holds BlackRock Continental European Income, which he said has a compelling long-term track record of strong risk-adjusted returns and dividend growth, as well as an attractive yield (currently 3.4%). The managers, Stuart Brown and Brian Hall, have a total return mindset.

Meanwhile, Polar Capital European (ex UK) Income is Allen’s go-to fund on the continent. The manager, Nick Davis, has an absolute return approach and aims to deliver returns of about 10% with just under half coming from dividends. The fund has yielded 4% over the past 12 months.

Davis has a good investment discipline, Allen continued. “He is looking for relatively dull European companies that are growing in single digits.”

Both funds have had a strong 12 months, pulling ahead of their benchmarks and sector, although their total returns are below the sector average over three and five years.

Performance of funds vs sector over 1yr

Source: FE Analytics

Japan: Land of the rising payout

Japanese corporate governance reform has led to large amounts of cash being released to shareholders, Allen said, making the country an increasingly attractive space for income-seeking investors.

Many companies within the Morant Wright Nippon Yield fund still have about 50% net cash so the process of returning cash to shareholders still has a fair runway ahead, he added.

The fund’s dividend yield is 3.3% but Morant Wright expects to achieve returns of around 10% from a combination of share buybacks, regular dividends and special dividends – even without the need for any earnings growth on top, Allen explained. He has held the fund for two and a half years.

Canaccord Wealth uses the Baillie Gifford Japanese Income Growth fund, which has a core total return approach and is managed by Matt Brett and Karen See.

Performance of funds vs sector over 3yrs

Source: FE Analytics

Asia Pacific, emerging and frontier markets

Tyndall and Canaccord both invest in the JPMorgan Global Emerging Markets Income trust, which pays a 4% yield and has a quality bias.

Allen has followed portfolio manager Austin Forey for years and said he is adept at leveraging JPMorgan Asset Management’s pool of analysts. “They’ve got a very systematic way of looking at those relatively few quality companies in each market that are going to be good stewards of capital,” he added.

Performance of trust vs sector and benchmark over 3yrs

Source: FE Analytics

Tyndall also uses the BlackRock Frontiers trust for total returns, income and diversification. It isn’t explicitly an income strategy but local investors in several of its markets are dividend-driven, meaning there are some pockets of the portfolio where income is more important than others.

As such, the trust tends to deliver a decent income stream, Allen said – although that waxes and wanes depending on how much the trust allocates to higher income markets. The fund has paid a 4% yield over the past 12 months.

In Asia, Canaccord Wealth holds the Prusik Asian Equity Income fund, which has a contrarian value style and is managed by Tom Naughton. The $721m fund aims to outperform the MSCI AC Asia Pacific Ex Japan Gross Return index (USD) by 5-10% annually whilst growing its dividend.

Prusik’s investment process combines qualitative and quantitative elements, such as screening for companies that pay a high dividend and are best positioned to sustain and grow their payouts.

Naughton looks for companies that are attractively valued but which also boast exceptional franchises, annuity-like cashflows and pricing power.

US equity income

In the US, Tyndall uses the SPDR S&P US Dividend Aristocrats UCITS ETF for equity income, which pays a 2.3% yield.

“It does track a relatively high-quality set of stocks and that – excuse the pun – pays dividends when the markets are in trouble. So this year, the fund was a real outperformer around ‘Liberation Day’,” Allen said.

“We’ve got a US underweight anyway but I don’t really look to the US when it comes to yield. Dividends are not much to write home about.”

Performance of ETF vs S&P 500 and sector YTD

Source: FE Analytics

Warraich said the US equity market is a hard one in which to outperform, where “the odds are stacked against you” for active managers. He uses the Fidelity US Quality Income UCITS ETF, which is a cheap way to access the stock market and achieve a robust dividend stream with a focus on quality.

UK equity investment trust managers are enjoying a moment in the sun, as the domestic stock market raced ahead of US and global equities this year.

The IT UK All Companies sector pulled ahead of the IT Global sector average in late February and now leads by a solid nine percentage points, as the chart below shows. The gap is also clear over 12 months, with UK-focused investment trusts posting a 12.8% return compared to 4.8% for the global peer group.

Performance of sectors over 6 months

Source: FE Analytics

While it’s still too early to call a structural recovery or the reversal of a decade of UK underperformance, some managers are feeling upbeat.

The UK market fell sharply after Brexit compared to global peers, but since then, it has been performing in line with international markets – yet few investors seem to have noticed. One who certainly did was Alex Wright, manager of Fidelity Special Values.

“This shift has made the UK an attractive hunting ground for contrarian value investors and was driven by strong earnings growth from UK companies in the portfolio,” he said.

Performance of fund against index and sector over 1yr

Source: FE Analytics

David Smith, manager of Henderson High Income Trust, said the catalyst for a UK recovery has already been triggered.

“It’s no secret that the UK equity market has significantly underperformed the global index over the past 10 years or so. However, looking at long-term analysis, UK underperformance hasn’t always been the case. The UK outperformed the global index in the ‘70s, ‘80s, ‘90s and noughties. During these decades, interest rates were higher versus the near-zero rates we have experienced since the global financial crisis,” he observed.

“Interestingly, since interest rates started to rise at the end of 2021, the FTSE 100 has outperformed the MSCI World ex UK Index. This would suggest that the catalyst may have already happened and a more normalised level of interest rates has led to better returns from the UK market.”

Performance of fund against index and sector over 1yr

Source: FE Analytics

A cheap market and a stable political environment are also helpful at a time when many investors seem to be reassessing their exposure to the US, as Simon Gergel, manager of Merchants Trust, noted.

Given the recent increase in share buybacks and takeover bids from private equity and corporate buyers, a revaluation of the UK market looks overdue, he said.

Performance of fund against index and sector over 1yr

Source: FE Analytics

When it comes to the most compelling areas, Smith highlighted domestically focused businesses. UK consumers are supported by low borrowing levels, high savings, falling oil prices, a weaker dollar and continued wage growth, he said.

Valuations in consumer-exposed areas of the market are “particularly attractive”, with the manager highlighting companies such as Premier Inn owner Whitbread, housebuilder Taylor Wimpey and real estate company British Land.

Gergel agreed that companies associated with the housing market, either building homes themselves or supplying materials, look “well placed to benefit from recovering house building volumes and lower interest rates”.

He added: “Real estate companies should benefit from recovering asset valuations over time, and many are trading at historically low levels compared to those asset values.”

At Fidelity, Wright’s portfolio is orientated towards cyclical areas, in particular industrials, advertising and staffing. He has also been selectively adding exposure to real estate stocks and housing-related names.

“We recently increased exposure to retailers specialising in big-ticket items such as kitchens and sofas, where sales are 10% to 25% below historical volumes,” he said. “We anticipate an improving outlook as housing market volumes strengthen and interest rates decline, coinciding with a reduction in industry competition.”

In a similar vein, Charles Luke, manager of the Murray Income trust, highlighted long-overlooked opportunities in home furnisher Dunelm, which he believes can continue to grow its share of a fragmented market, and telecoms company Gamma Communications, which has just moved from the Alternative Investment Market (AIM) to the main market.

Performance of fund against index and sector over 1yr

Source: FE Analytics

“Dunelm has a strong selection of own-label products across different price ranges and works closely with its suppliers under long-term partnerships. The shares trade on a mid-teens price-to-earnings (P/E) ratio with a dividend yield of around 4% and this has typically been supplemented by an additional annual special dividend, given the strength of the balance sheet,” he said.

“Finally, the increasing complexity of communications is a growth driver for Gamma Communications, which benefits from recurring revenues, strong margins, high cash conversion and a product that is critical to the businesses that use their services. We think a mid to low-teens P/E multiple belies the growth potential for the business.”

The importance of security has been accelerated by the dramatic reshaping of international relations under the second Donald Trump administration.

It is becoming a greater priority for governments, industries, companies, and individuals – and this trend will be increasingly impactful for financial markets over the coming years. From an investment perspective, security is increasingly impacting all aspects of financial markets. 

Inherent tensions in international order

We are living through a profound shift in the geopolitical landscape. At its heart is the growing strain from increased global population, economic growth and resource consumption, which exacerbates issues such as climate change, resource scarcity and geopolitical instability – challenges too complex for any one nation to manage alone.

These challenges have exposed the increasing weaknesses in the post-Cold War order. Yet with no consensus on the ideal political or economic system, nor a sufficiently shared global identity, there is currently no realistic pathway to a single unified solution.

These fundamental shifts have recently become more pronounced, as evidenced by the foreign policy direction taken by the new Trump administration in the US. The relative stability of a unipolar, US-dominated world in recent decades has frayed and is giving way to a ‘multipolar’ world.

With the US redefining its relationships with both traditional allies and rivals, China and other ‘non-Western’ countries too are seeking to reshape the international order in their favour, using protectionism, trade wars and even the rising threats of military action to further their interests.

Increasingly, financial decisions made by organisations and individuals worldwide are driven by security concerns rather than purely economic or efficiency-driven motivations.

The definition of 'security' has expanded significantly, covering not only direct threats like cyber and military actions but also broader vulnerabilities in global food and energy supply chains.

It now also encompasses rising unease about the reliability and sustainability of established global networks for trade, investment flows, information exchange and the free movement of people.

The end of Pax Americana

While the inherent tensions in the international order have been building for many years, the events of the early 2020s – including the pandemic, the Russian invasion of Ukraine, and the re-election of president Trump – suggest that the cracks in the system have widened beyond repair, and we have entered a new era: one in which security will play a major role.

The actions of the new Trump administration, most obviously the extraordinary levels of tariffs announced on 'Liberation Day', are the final nail in the coffin for the 'Pax Americana' – the era of relative peace and stability, underpinned by a US commitment to a rules-based world order.

This has sharply accelerated the trend towards 'power politics' where international relations are dictated by power dynamics and national interests, rather than global institutions or frameworks based on common rules and values.

New era, new opportunities

This environment comes with risks, but also opportunities. For example, companies such as cybersecurity specialists Fortinet and Palo Alto Networks should benefit from increased spending on combating sophisticated cybercrime.

Similarly, with businesses and governments prioritising supply chain resilience, this is creating opportunities for companies that provide reliable access to energy, food, and critical materials. This will benefit companies involved in natural resources, like Rio Tinto, and the food supply chain, like Deere.

While we see these geopolitical shifts as relevant for almost every large, listed company, some industries and businesses are naturally more resilient. This could be because they are more domestically oriented, serving a local rather than international client base.

The nature of the business may also mean it has very simplified supply chains, or limited exposure to geopolitical disruptions, or could even benefit from a more sympathetic regulatory regime, as policymakers seek to protect and nurture homegrown champions.

Financial services businesses, such as CME Group and JP Morgan Chase, remain relatively resilient in this regard. Another example is the South America-based retailer MercadoLibre, which we view as comparatively well insulated against supply chain disruptions, potentially allowing it to benefit more from this environment than its peers.

Adapting to change

The core of our thematic philosophy is that markets, by focusing too much on the short term, underappreciate the long-term impact of broad, inexorable themes such as shifting demographics, technological developments, and the growing challenge of climate change.

The existence of these themes is no secret. However, institutional pressures to deliver short-term performance and behavioural biases that oversimplify complex issues often prevent investors from accurately assessing long-term impacts – causing them to overlook significant risks and opportunities.

By adding security to Sarasin & Partners’ thematic framework, we acknowledge its growing importance in shaping financial markets and we equip ourselves to understand its effects thoroughly – both the challenges it creates and the investment opportunities it unlocks – as this structural change permeates the global economy.

Colm Harney is a portfolio manager at Sarasin & Partners. The views expressed above should not be taken as investment advice.

European investors would have been better off holding a passive tracker than taking their chances on an active fund since 2020, according to Trustnet research.

It has been a volatile five years for European investors, with portfolios shaken by the war between Russia and Ukraine, a global pandemic and heavy reciprocal tariffs. In theory, active funds should navigate these challenges better than their passive counterparts – in practice, it has been hard to escape the spectre of passive outperformance.

In the next part of an ongoing series, Trustnet examined the market capitalisation, investment style and performance of active and passive funds to determine the ultimate way to invest in Europe since 2020.  We have concentrated specifically on the European ex-UK sectors, funds and indices.

Market capitalisation and investment styles

Starting with the indices, we examined the performance of the Euro STOXX 50, MSCI Europe ex UK and MSCI Europe ex UK small cap.

Since 1 January 2020, the mega-cap Euro STOXX 50 emerged triumphant, up by 62.8%, followed by the MSCI Europe ex UK at 51.8%, with small-caps trailing at 40.5%

Performance of indices since 2020

Source: FE Analytics

Dig deeper into investment styles and some interesting data emerges. On the one hand, the large-cap value index is the best-performing, up by 59.6%. However, for most of the period, it trailed its large-cap growth counterpart and has only started outperforming this year.

Nevertheless, value has generally performed better across the market capitalisation spectrum, with large, mid and small-cap value ranking as the first, second and fourth best investment styles of the period.

Performance of indices since 2020

Source: FE Analytics

Active vs passive

Turning to how active funds performed compared to their passive counterparts, passives emerged on top, much like they did in the UK.  

An investor who tracked the MSCI Europe ex UK index would be up 51.7% at the time of writing. Those tracking the Euro STOXX 50 would be in an even better position, with the index having surged 62.8% since 2020.

By contrast, the average IA European ex UK active fund is up 49.1%, while the IA European Smaller Companies peer group is up 30.7%.

Performance of IA Sectors vs the benchmark since 2020

Source: FE Analytics

As a result, over the past five years, the best way to invest in Europe was to buy a large-cap tracker.

Rory Powe, portfolio manager at Man Group, explained why larger companies had the edge: “In an unpredictable world, companies need global breadth and balance to succeed. Many of Europe’s leading firms avoid overreliance on any single region, instead drawing revenues from a broad geographic base.”

Marcus Morris-Eyton, manager of the AB European Growth fund, added that large European companies such as SAP Software and ASML had "their destinies in their hands". With great fundamentals, solid balance sheets and sustainable barriers to entry, the largest stocks in the European market have been more resistant to macroeconomic challenges such as trade wars and geopolitical conflict than some of their competitors, he explained.

For an investor who wanted to take advantage of large-cap outperformance, there are several appealing choices. For example, the Xtrackers Euro STOXX 50 UCITS ETF tracks the 50 most prominent stocks in the European market. At an ongoing charges figure (OCF) of 0.09%, it is one of the cheapest ways of gaining exposure to Europe’s most prominent and top-performing stocks. Other asset managers such as BlackRock and HSBC offer similar low-cost passive products.

However, while beating the market was difficult for many active funds, it was certainly not impossible. For example, 48% of funds in the IA Europe ex UK sector beat the MSCI Europe ex UK, and 14% beat the Euro STOXX 50 over this period. The table below shows the top 10 funds in Europe since 2020, all of which beat the MSCI Europe ex UK and the Euro STOXX 50.

Source: FE Analytics

Topping the list is the WS Ardtur Continental European fund, managed by Oliver Kelton since 2015.

It is followed by the Liontrust European Dynamic fund, managed by Samantha Gleave and James Inglis-Jones. This is a more flexible strategy than many of its peers and has outperformed recently due to the fund's willingness to pivot from growth investing in some years to value in others, according to the managers.

The only smaller companies fund to rank within the top 10 since 2020 is the Invesco European Smaller Companies fund, managed by FE fundinfo Alpha Manager James Matthews. He has proven an excellent stockpicker with the fund achieving the fourth highest information ratio in the entire IA universe last year.

Other funds to qualify included Artemis SmartGARP European Equity, Waverton European Dividend Growth, Janus Henderson European Focus, BlackRock European Dynamic, Marlborough European Special Situations, Invesco European Focus, and JPM European Dynamic Ex UK.

Previously in this series, we have looked at the UK.

Square Mile Investment Consulting & Research has swung the axe on its fund ratings, removing titles from four funds and downgrading three more portfolios in April.

Among those removed from its Academy of Funds entirely were a trio of UK equity funds: Unicorn UK Income; Unicorn UK Ethical Income; and SVM UK Opportunities.

On the former, analysts at the firm said they had made the “difficult decision” to remove the two Unicorn funds, which held an ‘A’ and ‘Responsible A’ rating respectively.

Both have sat in the bottom quartile of the IA UK Equity Income sector over the past one, three and five years. UK Ethical Income has been the worst performer in the sector over these time periods, while UK Income has been among the bottom five funds in each. The older UK Income fund is also the fourth-worst performer in the sector over the past decade.

Performance of funds vs sector and benchmark over 5yrs

Source: FE Analytics

“Whilst we acknowledge the tough environment for UK small- and mid-cap investors over recent years, the return profile of both funds has not been in line with expectations. Consequently, our conviction has waned to a level where we feel we can no longer support the funds’ inclusion,” the analysts said.

SVM UK Opportunities also lost its ‘A’ rating following a review of the UK equity sector. While long-tenured fund manager Neil Veitch has run the fund since 2006 and has made strong returns over the portfolio’s lifetime, recent performance has underwhelmed.

This decision “in part reflects the diminishing investor interest for UK actively managed equities over recent years,” the analysts said.

“In addition, whilst acknowledging the tough environment for UK equity strategies that invest across the market-cap spectrum, we have concerns over the fund's medium-term return profile within what is a competitive landscape.”

Elsewhere, Federated Hermes Impact Opportunities lost its ‘Responsible A’ rating following a period of underperformance. Indeed, the fund has sat in the bottom quartile of the IA Global sector over one, three and five years, making just 2.9% over the past half decade.

Since launch, it has gained 27.6% at a time when the average peer is up 74.2% and the MSCI ACWI benchmark has risen 89.7%, as the below chart shows.

Performance of fund vs sector and benchmark since launch

Source: FE Analytics

What’s more, analysts at Square Mile said there could be more pain to come for investors as the fund is facing “multiple headwinds due to its inherent impact biases”.

They said the fund has struggled to deliver the expected outcome the analysts were forecasting – beating the MSCI AC World IMI Index by 2-3 percentage points per year.

While it is “commendable” that the fund managers have remained true to their impact approach, “in an environment where positive investor sentiment and flows into the fund have dissipated, we do not see a catalyst that would provide renewed buoyancy to this proposition”, the analysts said.

Lastly, the Barings Emerging Market Debt Blended Total Return fund also had its ‘A’ rating removed after Ricardo Adrogué, head of global sovereign debt and currencies, announced he is to retire at the end of August 2025.

“Despite the resources within the firm's emerging markets debt team, we have always considered Adrogué as a key figure for the fund as head of the team, architect of the strategy and lead manager of the local currency element of the portfolio,” they said.

Square Mile also downgraded the Baillie Gifford Global Alpha Growth fund and Monks Investment Trust from ‘AA’ to ‘A’.

“The performance of the two strategies has seen challenges over recent years and the managers have made some adjustments to the process as a result. The analysts feel that these have not yet addressed the issue and believe that an A rating better reflects their current conviction in the funds,” the ratings agency said.

Meanwhile, the Veritas Asian fund was also downgraded to an ‘A’ rating after a “challenging period of performance” in recent years. The fund is in the bottom quartile of the IA Asia Pacific Excluding Japan sector over three and five years, although it remains in the top quartile since its launch in 2016.

Performance of fund vs sector and benchmark over 5yrs

Source: FE Analytics

“Whilst we continue to believe it to be a differentiated and attractive strategy and acknowledge that the broader market environment has not been helpful, we feel an A rating is more reflective of our current level of conviction in the fund,” analysts said.

It was not all bad news however, with four funds given new ratings. Jupiter UK Income was one of two to be given an ‘A’ rating. Run by Adrian Gosden and Chris Morrison, who took over from Ben Whitmore in 2024, the new managers invest with the belief that dividends are an important driver of total equity returns over the long term.

“With this focus in mind, the investment approach has been designed to identify stable, cash-generative companies that can pay strong and progressive dividends,” the analysts said.

“We view this as a solid option for investors seeking exposure to a relatively high conviction portfolio of income-generating stocks, managed by a highly capable investment duo.”

Since the new management team took charge of the fund it has made the seventh-best return in the 68-strong IA UK Equity Income sector, up 18.4%.

Performance of fund vs sector and benchmark since manager start

Source: FE Analytics

Regnan Sustainable Water and Waste also received an ‘A’ rating. It invests in companies that tackle global water and waste environmental challenges, with the analysts noting it is a “compelling proposition driven by a durable thematic tailwind, a stable investment process and highly experienced fund managers”.

Lastly, the CT Universal multi-asset range, including the Defensive, Cautious, Balanced, Growth and Adventurous funds, were all given a ‘Recommended’ rating based on the “breadth” of the Columbia Threadneedle team.

It “represents a robust range for clients seeking low-cost, actively managed multi-asset funds with a bias toward UK equities,” they said.

Abrdn Asia Pacific ex Japan Equity Tracker also garnered a ‘Recommended’ rating. The fund is managed by Aberdeen’s Quantitative Index Solutions team.

“Although smaller than some of its peers, the team has significant experience in running index strategies and we believe they have the necessary resources to achieve good tracking outcomes, as demonstrated historically. Additionally, the fund is competitively priced, offering good value for money to investors looking to invest in the region,” they said.

Invesco’s latest assessment of value report flagged three funds for failing to deliver value: the Invesco Japanese Equity Advantage (UK) fund, the Invesco UK Companies fund and the Invesco European Equity Income (UK) fund.

Martin Walker’s £130m Invesco UK Companies fund has delivered a 65.5% return over five years but failed to beat the FTSE All Share.

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

Source: FE Analytics

Invesco said the fund’s manager and investment process were changed in September last year and argued that fund is better positioned to deliver value in the future.

The £452m Invesco European Equity Income fund was also flagged for failing to beat its benchmark, the IA Europe Excluding UK sector, over the past one, three and 10 years.

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

Source: FE Analytics

The assessment of value report added: “The team has taken action to address performance challenges and will need time to assess whether the changes made are resulting in better performance outcomes.”

Finally, the £94m Invesco Japanese Equity Advantage (UK) also underperformed over the past three, five and 10 years, ranking within the third or bottom quartile of its peer group. Over 10 years it is the worst performing fund in the sector, up by just 49.9% compared to a sector average of 100.6%.

However, recent performance is better, with the fund up 7.7% over the past year, outperforming the sector average and benchmark.

Performance of fund vs sector and benchmark over one year

Source: FE Analytics

This improvement was attributed to changes made last year, when FE fundinfo Alpha Manager Tadao Minaguchi took over from the previous manager and the fund’s emphasis on environmental, social and governance (ESG) criteria was removed. Invesco conceded that it “needs time to assess if the changes made are resulting in better performance” but concluded that no further action is currently required.

The Schroder Income Growth investment trust is making a raft of changes to mitigate its recent underperformance and enhance shareholder returns.

From 1 September, it will operate with a fee of 0.40% instead of the current 0.45%, which will be charged on either its market capitalisation or net asset value (NAV), depending on which one is lower.

Chairman Ewen Cameron Watt admitted: “One of the largest elements of costs is the fee paid for investment management services provided by Schroders”.

The separate fee for secretarial and administration services will also be eliminated, with an expected cost reduction of over £300,000 (based on the market cap and NAV of the company as at 12 May 2025).

The board also appointed Matthew Bennison, who currently leads the Schroder Sustainable UK Equity funds and co-runs Schroder UK Alpha Income and Schroder Prime UK Equity funds, as co-manager. He will join Sue Noffke at the helm of the company with immediate effect.

Finally, ​the trust announced it will be adopting “an increasingly active attitude” to managing the volatility and level of discount (currently at -7.1%, as the table below shows) and maintaining it within a single-digit range in normal market conditions.

Discount/premium to NAV

Source: Trustnet

The trust has underperformed during the past six months, which Noffke mainly to her small-cap holdings, which remain unloved and lagged their larger counterparts, but also to stock selection. The FTSE 250 ex Investment Trusts and the FTSE SmallCap ex Investment Trusts indices fell by 4.2% and 7.3%, respectively; the FTSE 100 achieved a positive total return of 6.5% over the same period.“This performance divergence impacted the portfolio, which has greater exposure to small and mid-sized companies (7.3% overweight relative to its benchmark) and consequently a significant underweight position of -8.2% in larger companies,” the manager said.

Performance of fund against index and sector over 6 months

Source: FE Analytics

“As well as the impact of market-cap dynamics, underperformance was a result of adverse stock selection in several sectors, most notably consumer discretionary, industrials and consumer staples. This more than offset positive positioning and stock selection in the financial sector, which was the largest contributor to relative performance.”

In the six months to end February 2025, the main detractors were Rolls Royce (-0.8%), defence technology company QinetiQ (-0.6%) and retailer Pets at Home (-0.6%); the main positive contribution came from Standard Chartered (1.3&), Burberry (0.5%) and Pearson (0.5%).

Underperformance against the IT UK Equity Income sector has been a feature in the even longer term; the strategy ranked in the fourth quartile of returns over the past 10 years and third-quartile over the past five, three and one year.

In the era of Trump 2.0, chaos has reigned, change has become the only constant and if fund managers are certain of one thing, it’s that uncertainty is pervasive.

Although tariffs have been reduced significantly since the ‘Liberation Day’ announcements on 2 April, they are still expected to cause a slowdown in global trade, so fund managers are turning to quality stocks that have strong enough balance sheets to weather policy uncertainty and slower growth.

Simon McGarry, head of equity research at Canaccord Wealth, said: “When economic growth slows, investors want companies that have strong balance sheets, consistent earnings and resilient cash flows. And at a time when inflation is lingering and interest rates aren’t falling as quickly as investors would like, companies with low debt and strong fundamentals are preferred over highly leveraged stocks.”

To find companies with high profit margins and low leverage, McGarry used Canaccord’s Quest database to measure net debt to EBITDA (earnings before interest, taxes, depreciation and amortisation), EBIT margins and earnings per share (EPS) growth. Quest identified seven high-quality stocks, as the table below illustrates.

The UK’s highest-quality stocks

Source: Quest, a division of Canaccord Genuity, data as of Mar 2025

Halma

McGarry described Halma as “a high-quality defensive stock with a strong track record in safety and environmental technology”. Its portfolio of technology companies solve challenges, such as water safety and health during childbirth.

“Its 21% EBIT margin highlights strong operational efficiency. With steady 11% average EPS growth over the past decade and low leverage (net debt/EBITDA of 0.7x), Halma offers consistent compounding returns,” McGarry explained.

Alexandra Jackson, manager of Rathbone UK Opportunities, said Halma’s decentralised model enables companies to focus on what they do best but draw “support from the Halma nerve centre” for hiring best practice or by using the balance sheet for deals.

“When the finance team was charged with improving working capital in the business, they took the time to explain to those responsible for streamlining inventory and collecting cash why exactly it was such a priority. The result was a much more rapid improvement in cash conversion than we were expecting,” she said.

RELX

RELX’s data analytics and decision-making software draw on specialised, proprietary data assets and incorporate a deep understanding of clients’ workflows, said Chris Elliott, portfolio manager of the Evenlode Global Equity fund.

“As RELX’s client base grows, the company is able to gain additional insights into its clients and thus continuously deliver incremental value through new services. For instance, the Lexis Nexis product can be trained to deliver more relevant historical case studies in response to a search,” he explained.

“This pipeline of innovation creates strong switching costs and a reliable stream of subscription revenue, resilient to any wider macroeconomic volatility.”

Diploma

Diploma resells industrial components such as seals, wiring, surgical and diagnostic equipment.

Rathbones' Jackson said: “Its low cost, mission-critical components, crucially with a service wrapper, allow it to make a 20% margin. Its end markets also have strong structural tailwinds, such as onshoring of manufacturing capacity in the US, or increased spend on medical equipment for an ageing population.”

Diploma is less cyclical than other industrial names thanks to its global revenue spread, strong market positions and the diversity of its end markets, said Abby Glennie, manager of the abrdn UK Smaller Companies Growth Trust.

Diploma has a consistent track record of organic growth, while its bolt-on acquisition strategy, funded through cash generation and well-supported capital raises, expands its addressable market, Glennie said.

Experian

Experian’s strength lies in its data network effect, according to Chloe Smith, an investment analyst on Sanford DeLand Asset Management’s Buffettology fund.

“The more data it aggregates, the more powerful and accurate its analytics become. In a world of rising digitalisation and personalisation, data is the key asset and Experian owns some of the most valuable proprietary data sets globally. This gives it pricing power, recurring revenue and a defensible competitive moat.”

Experian has multiple growth levers, she continued. “It reinvests effectively in technology while maintaining shareholder returns through dividends and buybacks. Experian exemplifies the kind of resilient, high-return business that can thrive across cycles.”

Softcat

Softcat is the largest value-added reseller of IT software, hardware and services in the UK, said Eric Burns, deputy manager of the CFP SDL UK Buffettology fund.

“Customers often view Softcat as being like an outsourced IT department and rely on it to help navigate an increasingly complex technology landscape. As a people business, Softcat is capital light and consistently earns a return on equity in excess of 40%. The conversion of profit into cash is high and the balance sheet is rock solid,” he noted.

“It has consistently delivered double-digit growth in revenue supported by long-term drivers such as cloud computing, cybersecurity and artificial intelligence (AI) adoption.”

Duncan Green, manager of Schroder UK Multi-Cap Income, owns Softcat for its “rare blend of quality, resilience and long-term growth”.

“It sits at the centre of clients’ critical IT decisions – helping them navigate the complexity of infrastructure, cybersecurity and digital transformation. This positioning, in a space where spend is increasingly non-discretionary, makes the business highly relevant and defensible,” Green explained.

“The company’s culture – entrepreneurial, client-centric and performance-driven – is a key competitive advantage that supports sustained market share gains. With expanding capabilities in AI and data, and management guiding to low double-digit profit growth, we believe Softcat is well positioned to continue compounding value.”

Autotrader

Autotrader has become the key place for dealers to list cars, said Imran Sattar, manager of the Liontrust UK Equity fund and the Edinburgh Investment Trust. "Having a dominant share of consumer eyeballs, as well as having essentially all of the inventory of used cars on its platform, allows the business to have long-duration pricing power. Growth also comes from developing more advanced data products for used car dealers to make them more efficient,” he said.

"Autotrader has a powerful economic moat and now commands very attractive profit margins and returns on capital. The capital light nature of the business model also means cash flow dynamics are excellent and the vast majority of cashflows are returned to shareholders in the form of dividends and share buybacks.”

AstraZeneca

AstraZeneca is attractively valued and “remains a strong defensive play”, Canaccord Wealth's McGarry said. “Its diversified drug pipeline and strong oncology segment make it a compelling investment for long-term stability and growth.”

AstraZeneca has been a core holding in the Liontrust UK Growth fund for over a decade and accounts for around 9% of assets. Fund manager Matt Tonge said it possesses three ‘economic advantage’ moats.

“It's one of the most innovative businesses in the UK with a market‑leading intellectual‑property estate (especially in oncology) that is refreshed by reinvesting roughly a fifth of annual revenue into research and development,” he explained.

“It has a global manufacturing and commercial network that can launch new products at scale and a stream of high‑visibility, patented revenues that funds disciplined reinvestment and a progressive dividend.”

China is an essential trade partner for the world, which has come to rely on its low-cost, decent-quality goods – and the US is no exception, according to Sammy Suzuki, FE fundinfo Alpha Manager of the AB Emerging Markets Multi-Asset Portfolio and the SVS Alliance Bernstein Low Volatility Global Equity funds. “The entire US economy cannot sustain itself without products from China,” he said.

Donald Trump’s tariff climbdown this week suggests he may have come to a similar conclusion. The US president had already exempted electronic imports from tariffs, sparing China from an extreme scenario in which people could no longer buy smartphones.

“In the modern era, if consumers can't access their smartphones, there would be riots. I don't know if that would have been politically wise – which is probably why Donald Trump had backed down on the electronics portion of the tariffs,” said Suzuki.

(In a similar vein, Iain Stealey, global fixed income chief investment officer at JPMorgan Asset Management, told Trustnet that if Trump had stuck to his guns and maintained extortionate tariffs on China, the resulting economic slowdown could have pushed the US into a recession.)

China’s economy is more resilient to disruptions in trade flows than investors may think, Suzuki continued. The current trade wars are only the latest chapter in a long story. Trump has been tightening the noose on China since he introduced tariffs during his first term but, despite his best efforts, China’s share of global exports has actually increased by 150 basis points during the past five years, he said.

China has maintained its dominant position in global trade by shifting its focus away from the US, towards countries such as Mexico and Vietnam, whose share of global exports increased by 20 basis points during the past five years. China’s continued dominance over global trade has encouraged Suzuki to keep faith. He has been identifying opportunities in the country for over a year, even as markets have moved in the opposite direction.

This has paid off since 2024, when the AB Emerging Markets Multi Asset Portfolio jumped ahead of the benchmark and of its peer group, as the chart below shows.

Performance of fund against index and sector over 3yrs

Source: FE Analytics

“A year ago people were saying that nothing good is happening in China and we should be overweight India just like everybody else, but that's not how we have been positioned,” he said.

The manager is convinced that country selection doesn’t drive returns as much as stock selection does, so he is focusing more on the 600 stocks that are available to buy in China.

“Is it possible that every single one of them are bad investments, or is it possible that because most people don't like China, there are 10 or 20 companies that are good investments that are being overlooked?”

In particular, he has identified three buckets: exporters, domestic growers and high-dividend yielders.

Companies in the third bucket are often value stocks and can be state-owned enterprises trading at a discount. “These are good, steady businesses with a 6% or 7% dividend yield, which the government is trying to restructure to improve the corporate governance and encouraging to pay out dividends a little bit more,” Suzuki explained.

“That can have a huge impact on the valuation, once they demonstrate that they're doing some of these things. So that's an opportunity.”

China and its companies have shown resilience, and even the most feared scenario among shareholders – a potential invasion of Taiwan – doesn’t overly concern Suzuki. “An invasion isn’t likely,” he said, adding that China’s dominance in global trade might even withstand such a crisis. “Even if China goes down that path, would we really stop all imports from the country? I’m not so sure,” he concluded.

The healthcare sector has a strong track record for successfully solving some of humanity’s most urgent challenges via medical innovation, a trend traditionally led by breakthroughs coming mainly from the scientific community. However, in recent years we have begun to witness healthcare solutions originating from organisations where technology is increasingly used to enhance scientific research processes – with advanced robotics, diagnostics and artificial intelligence (AI) equipment now occupying prominent roles in the modern medical research lab.

This increase in momentum could not have come at a more opportune time, with demographic challenges now creating pressure points throughout the global healthcare supply chain centred around ageing populations, a rise in lifestyle-linked ‘diseases of modernity’ and soaring costs.

Cost in particular is responsible for driving the creation of underserved patient populations, otherwise known as ‘medical deserts’. These deserts have historically arisen within rural communities; however, they are becoming increasingly prevalent within developed countries across regions which would otherwise be considered urbanised. For example, in the US almost 80% of counties are judged to lack adequate access to essential health services, whilst in France almost 50% of the population has either delayed accessing healthcare or foregone treatment entirely.

One notable example of a medical sector dramatically transformed by the confluence of technology and scientific research is cell and gene therapy, which has seen rapid growth, with over 1,200 therapies now in clinical trials globally. This is a significant leap from just five years ago when there were fewer than five therapies approved by the US Food and Drug Administration (FDA). Today, there are 38 approved therapies and the market has diversified its focus from rare diseases and oncology to include genetic disorders and autoimmune conditions, among others. This progress is largely driven by the enhanced precision of gene editing tools as technology has evolved.

Despite these encouraging advancements, one of the surprisingly persistent challenges facing the medical industry is the ability to scale production as a drug reaches commercialisation stage. The high costs associated with manufacturing coupled with the complexities of scaling the production of a new treatment often halts the progress of these lifesaving therapies and makes it difficult to find investors willing to commit the necessary funding to develop new treatments in the first place. This creates a space where active private equity investment by sector specialists can make a real difference.

Healthcare companies in the meantime are positioning themselves to capitalize on this wave of investment interest by strengthening and diversifying their supply chains, as well as outsourcing to ensure scalability of production can actually be achieved – resulting in a compelling range of opportunities for investors.

At Patria Private Equity Trust, we invest in the 'picks and shovels' of the medical industry rather than taking on the significant, often binary, risk associated with individual drug development or single product investments. In the cell and gene therapy market, this has included contract development and manufacturing organizations (CDMOs) and manufacturers of inputs into gene therapies, such as plasmids and reagents.

One example is Clean Biologics, a contract manufacturer and testing business based in France, which provides services for biotherapeutic development that are compliant with the FDA’s good manufacturing practices (GMP) regulations. Clean Biologics benefits from the rising pipeline of biotherapies and, particularly for such biotherapies, the trend towards increased outsourcing by biopharma companies due to stringent regulatory requirements and a lack of in-house expertise and capacity. As the leading testing provider in the European market, Clean Biologics is well positioned to benefit from this structural tailwind.

Looking beyond cell and gene therapy, Patria Private Equity has made several investments in health tech, including DocPlanner, a rapidly expanding digital health ‘matchmaking’ platform which connects patients with healthcare providers. We have seen an increase in consumer demand for accessible and convenient healthcare services offering a streamlined process, something which DocPlanner delivers through its software as a service (SaaS) tool, which enables healthcare providers to optimise patient flow, reduce no-shows for appointments and digitize certain aspects of operations.

Focusing on the mid-market, technology advancement is moving particularly fast within smaller, agile healthcare businesses, which are less likely to be encumbered by legacy processes or dated technology stacks. This corner of the market is accelerating the pace of change across the wider healthcare market, leveraging emerging technologies to develop medical products and services faster and more cheaply than larger competitors.

Companies fitting this profile are the kind of investments likely to be found within Patria Private Equity’s portfolio because of the greater potential to unlock value. It is our view that the future winners in the healthcare market will be those businesses who understand clearly that success relates just as much to the practical aspects of running a business as it does to the scientific talent driving the discovery of a new cure. Companies which strike this difficult balance will stand a much greater chance of building long-term profitable businesses whilst simultaneously delivering life-saving treatment – two concepts which are no longer mutually exclusive.

Karin Hyland is a partner and deputy head of co-investments and Andrew McMillan is an investment director at Patria Private Equity Trust. The views expressed above should not be taken as investment advice.

Funds investing US equities, tech stocks and uranium miners are among those making the highest returns since markets started to recover from the Liberation Day sell-off, FE fundinfo data shows.

Markets were rocked on 2 April – so-called Liberation Day – when US president Donald Trump unveiled trade tariffs on much on the world and later embarked on a tit-for-tat series of hikes with China.

However, risk assets started recovering from 9 April, when the US announced a 90-day delay on most tariffs to allow time for trade deals to be negotiated. Last week, the UK was the first country to clinch a trade deal with the US, then markets rallied yesterday when the US and China agreed to slash tariffs.

Between 2 April and 9 April, the MSCI AC World fell 9.5% in sterling terms but it has rallied 12.8% since the tariff delay was announced (aided by a 3% jump yesterday after the US-China deal).

This means that global equities have gained 2.1% since Liberation Day, led by growth and tech stocks – the same areas that led the falls when the tariffs were first announced.

Performance of MSCI AC World and sub-indices since 2 Apr 2025

Source: FinXL

The impact on funds has been just as noteworthy. Between 2 April and 9 April, 90% of the funds in the Investment Association universe made a loss but this has since reversed and 88% have made a positive return since 9 April’s tariff delay.

This means that 75% of funds have made a positive return since Liberation Day – an outcome that many commentators at the time (including this journalist) would have thought very unlikely.

FE fundinfo data shows there are 20 peer groups where every fund is in positive territory since 9 April, including IA UK All Companies, IA UK Equity Income, IA UK Smaller Companies, IA Mixed Investment 40-85% Shares, IA Global Equity Income and IA China/Greater China.

IA Global just missed out with 99% of funds in the black while the stat for IA North America is 98%.

However, it’s worth remembering that many of these sectors had 100% of their members posting losses in the week after Liberation Day.

But which funds have made the biggest gains since the 90-day tariff delay reassured markets and sparked a jump in investor sentiment?

According to FE Analytics, the average fund in the IA Technology and Technology Innovations sector is up 15% since 9 April, followed by IA Financials and Financial Innovation (up 14.1%), IA UK Smaller Companies (up 13.9%) and IA European Smaller Companies (up 13.4%).

As the table below shows, many of the individual funds with strong returns are relatively niche strategies, rallying hard as investor sentiment improved but taking heavy losses when markets panicked.

Source: FinXL

Among the best performers are Sprott Junior Uranium Miners UCITS ETF and HANetf Sprott Uranium Miners UCITS ETF. Uranium and its miners have outperformed the wider stock and commodity markets in recent years, supported by growing interest in nuclear power and a supply deficit.

Uranium prices hit a record high in February and have since come off their peak but were relatively stable when stocks, bonds and other commodities were hit with Liberation Day volatility. However, its miners were still caught up in the sell-off.

Jacob White, ETF product manager at Sprott Asset Management, said: “In a market increasingly gripped by macroeconomic volatility and rising correlation across asset classes, uranium is quietly distinguishing itself, holding firm where others have cracked.”

Other themes can be seen in the list of the strongest funds during the rally, including the resurgence of tech stocks.

Nikko AM ARK Disruptive Innovation, Candriam Equities L Robotics & Innovative Technology, AB International Technology Portfolio and WisdomTree Artificial Intelligence UCITS ETF are among the top performers.

Tech stocks led the market for a considerable amount of time but started to struggle in the past few months as investors worried about excessive valuations and weakening growth.

They were hit hard when it looked like Trump’s widespread tariffs could derail the US economy but have rallied strongly after the 90-day delay was implemented and trade deals started to emerge.

Seventeen workplace pension providers have promised to invest at least 10% of defined contribution (DC) default funds in private markets by 2030, with at least half of this earmarked for UK assets.

M&G, Aviva, NatWest Cushon, TPT Retirement Solutions, now:pensions, Mercer and others have committed to do this by signing the Mansion House Accord. This voluntary agreement doubles pledges made in the 2023 Mansion House Compact, which had a 5% private equity target.

Chancellor Rachel Reeves is planning to introduce legislation later this year to compel pension funds to invest up to £50bn in private assets if they do not make sufficient progress on their own, according to the Financial Times. Mandatory targets would be a last resort.

Signatories claimed that private market investments would enhance returns for pension savers whilst stimulating the UK economy.

Andrea Rossi, chief executive (CEO) of M&G, said: “Private markets play a fundamental role in shaping the world around us through long-term investment in real estate and infrastructure projects, alongside lending to and investing in companies that contribute to economic growth. By enabling and encouraging greater investment into these assets, individuals could benefit from enhanced returns, greater diversification and better value.”

Another benefit of investing domestically is helping people feel more connected with their retirement savings, said Ben Pollard, CEO of NatWest Cushon, the workplace savings and pensions fintech. “These types of investments are real and tangible and show savers how hard their money is working to improve their standard of living in the UK,” he explained.

For instance, NatWest Cushon invests in a sweet pepper farm in Suffolk whose carbon footprint is 75% lower than conventional farms because it reuses waste heat from a nearby water treatment works.

“The low carbon farm in Suffolk is a great example of a real and tangible investment that brings pensions alive for savers. Our customers can visit and physically see how their pension is being invested and then go into a supermarket and literally eat the fruits of their investment,” Pollard said.

Many pension schemes already invest in productive finance and most are open to investing more in the UK, but the government needs to play its part in facilitating these investments, said David Lane, CEO of TPT Retirement Solutions.

“Hurdles remain around value for money considerations and the availability of suitable investment opportunities. These should be a focus for government policy to spur more investment,” he stated.

“The most pressing issue to deal with is that provider pricing practices leave very little room in the annual management charge for investment fees. There needs to be a shift to a value for money approach that considers the returns from an investment and not just its fees.”

Today’s agreement could be “the thin end of the wedge” as far as government interference in pension funds’ investment strategies goes, warned Jason Hollands, managing director at wealth management firm Evelyn Partners.

“However desirable the government’s objectives might be – like boosting economic growth – from a public policy lens, the fear is that pension schemes could be distracted from the interests of the end saver, which should be their primary concern,” he said.

“Pensions have a fiduciary duty to deliver decent risk-adjusted returns for their members, not serve domestic public policy goals. Sizeable allocations to illiquid investments are not without risk.”

Reeves’ threat of mandatory targets also raises alarm bells. “The gnawing concern is that this ‘voluntary’ commitment is really a case of the government wielding a stick rather than offering a carrot,” Hollands said.

“Some heavy-hitting commentators like baroness Altman have called for a mandatory allocation of 25% of UK savers’ pensions into UK assets in order to qualify for tax reliefs. Others in the City are lobbying for measures that would refocus stocks and shares ISAs on UK investments.

“Whether by stick or carrot measures, it is possible that we have passed the era of peak investment flexibility in tax-efficient UK accounts.”

One month after US president Donald Trump jolted markets with his controversial 'Liberation Day' tariffs, most of the initial panic has subsided. Talks have resumed and relations are tentatively improving, even with long-time adversary China. Investors appear to be slowly regaining confidence, though a sobering consensus is emerging: the dollar is on a steady path of decline.

This is the view of Iain Stealey, global fixed income chief investment officer at JPMorgan Asset Management and co-manager of the JPM Global Bond Opportunities fund, who declared: “We have reached peak dollar and peak US enthusiasm”.

“The dollar has been on a one-way trade for the past couple of decades, and that is now being unwound,” he said. “I'm not sure whether it will continue to unwind at the same pace that we have seen over the past month or so, but I do think a structural decline of the dollar has begun.”

Over the year to date, the currency has lost 5.9% of its value against the pound, as the chart below shows, despite regaining some of its losses yesterday.

US dollar in sterling terms over the year to date

Source: Google Finance

The main culprit is politics, Stealey said, but he also pointed to market dynamics in Asia, where support for the dollar has started to wane.

In Asia, people generally prefer to save money in unhedged dollar assets. This worked while the dollar was appreciating, but to avoid volatility, investors now need to adjust their hedge ratios – something insurance companies across Taiwan, Japan and Korea have already begun doing, Stealey explained.

Asian and emerging markets stand to gain significantly from a weaker dollar, the manager continued. “If traditional support for the dollar from Asian holders continues to fade, a weaker dollar – and the resulting decline in real yields – could provide a powerful tailwind for emerging market debt,” he said.

Emerging markets aren’t only benefiting from a positive currency impact, but also from constructive monetary policy.

“Central banks in emerging markets jacked up rates more aggressively and more swiftly than in developed markets, but they haven't cut them as much over the last year or so,” Stealey explained.

This has brought “quite attractively high real yields on offer” in places such as Mexico, where bond yields are over 9% while inflation is running at 4-5%, and Brazil. The £178m JPM Global Bond Opportunities fund has 5.4% in Mexico and 11.1% in emerging market debt.

Stealey isn’t the only manager finding emerging market debt appealing. Mike Riddell, manager of the Fidelity Strategic Bond fund, increased his allocation to local-currency emerging market debt to 16%– the highest level of his career.

For investors, the implications of a structurally weaker dollar are far-reaching, and for some, a prompt to reconsider portfolio positioning. The shift and the subsequent uncertainty have fuelled a surge in demand for traditional safe havens like gold, but at the same time, other so-called safe assets – most notably US treasuries – are facing a more critical reassessment. April’s disappointing performance across US fixed income has led some to question whether treasuries still deserve their reputation as a reliable refuge in times of market stress.

Despite these concerns, Stealey continues to view US government bonds as a cornerstone of stability, maintaining a significant 45.1% exposure in his fund. He argued that treasuries may retain their safe-haven status for some time yet, particularly if president Trump continues to retreat from his aggressive ‘Liberation Day’ stance.
“If nothing changed from the Liberation Day plan, the US would head into a recession,” Stealey said. “But Liberation Day was peak tariff uncertainty, and we are walking back from it slowly but surely.”

Evelyn Partners has launched its Cash & Cautious Bond portfolio service to UK financial advisers, providing a discretionary investment option designed to offer enhanced returns on cash holdings while maintaining low risk during a period of falling interest rates and global uncertainty.

Originally offered to Evelyn Partners’ direct clients from 2023, the strategy is now available to advisers for use with clients requiring capital preservation and liquidity. The portfolio invests in a mix of liquid, short-dated instruments including cash deposits, money market funds, UK Treasury bills, gilts and bonds issued by highly rated global institutions.

The strategy targets a return above those available from traditional cash accounts, aiming to reduce interest rate and credit risk while offering broader diversification than cash management or gilt ladder products. Investments are actively selected from a pre-approved list and tailored to individual liquidity needs and investment timelines.

Matthew Spencer, head of intermediaries at Evelyn Partners, said: “Our Cash & Cautious Bond strategy has been a widely welcomed solution over the past couple of years for direct clients of Evelyn Partners looking for a home for substantial cash balances. Savings accounts are already seeing reduced returns and with central banks expected to continue to cut benchmark rates, as we saw last week with the latest reduction by the Bank of England, this is set to continue.

“There’s a window of opportunity for financial advisers to lock in elevated short-term bond yields for their clients as part of a diversified and low-risk strategy. Current global economic uncertainty and volatile equity markets mean many clients are also looking for somewhere to earn an enhanced return compared to cash, while they wait until the macroeconomic outlook becomes clearer before putting money to work in riskier assets.”

The Cash & Cautious Bond portfolio service has an annual management fee of 0.15%, made up of a 0.10% custody fee and a 0.05% investment management fee. The firm does not apply transaction charges or commissions and invests directly in underlying instruments to minimise costs. All assets are held on Evelyn Partners’ custody platform in nominee accounts.

The strategy is rated as level 1 on Evelyn’s internal seven-point risk scale. It has no upper investment limit and permits top-ups at any time. Underlying assets are liquid and can be sold quickly if needed. The firm recommends a minimum investment size of £500,000.

Ian Kenny, investment management partner and head of fixed income at Evelyn Partners, added: “Interest rates and bond yields have been on quite a journey, moving from all-time lows to decade highs over the past few years, and that has fundamentally changed the landscape for savers and asset allocators at the short end.

“Now is a great time to be having conversations about cash or near-cash to make sure that cash balances are well-mapped to need and preference and are working as hard as they can be. The disciplined Cash & Cautious Bond framework allows us to build bespoke portfolios to suit each client’s needs and preferences but within a structure that is mindful of and limits interest rate, credit and liquidity risks.”

Investors may be understandably nervous as president Donald Trump’s fluctuating and contradictory approach to trade has made navigating markets challenging this year.

As such, Trustnet asked three experts which funds they would pair together to weather the volatile market environment of the past few months. One strategy stood out as a clear favourite for all three: Capital Gearing Trust.

When equity markets seem particularly turbulent, Anthony Leatham, head of investment companies research at Peel Hunt, said defensive strategies such as Capital Gearing Trust that “preserve capital over the short-term and build real wealth over the long-term” become extremely compelling.

He highlighted the trust’s positioning, with 30% in risk assets, 38% in index-linked bonds and 32% in dry powder (cash, treasury bills and corporate credit).

Tom Bigley, fund analyst at interactive investor, also praised its asset allocation, in particular the emphasis on index-linked government bonds was highlighted for “offering protection when stock markets fall and providing a shield against inflation”, which makes it well suited to today’s more volatile market environment.

Year to date, the portfolio is up 1.1% while the IA Flexible Investment sector is down 0.1%. As shown in the chart below, it slid much less than its peers following the announcement of ‘Liberation Day’ tariffs, demonstrating its defensive characteristics.

Performance of trust vs sector and benchmark YTD

Source: FE Analytics

Matt Ennion, head of fund research at Quilter Cheviot, explained that, while it is tempting to view the strategy as an “all-in-one solution”, due to current market turbulence, the trust cannot do it all alone.

As such, Leatham, Bigley and Ennion highlighted the funds and trusts that can serve as a complement for Capital Gearing in an investor’s portfolio.

AVI Global Trust

Leatham suggested investors should pair Capital Gearing with a “differentiated, low-beta global equity portfolio”, such as AVI Global Trust.

The trust takes an “unconstrained and high conviction” approach to global equities, prioritising companies trading at a significant discount to book value. This means the portfolio favours different holdings than a traditional global equity strategy, highlighted by its 23% allocation to Japanese equities and 41% allocation to family-run companies, Leatham said.

It is up by 107.2% over the past five years, compared to the IT Global sector average of 40%, the best performance in the peer group.

Performance of trust vs sector and benchmark over the past 5yrs

Source: FE Analytics

Leatham added that while Capital Gearing and AVI Global share an emphasis on valuations and taking advantage of market volatility, AVI Global “has a much higher correlation to equities”. As a result, Capital Gearing makes a compelling “defensive counterweight” to AVI Global’s contrarian approach.

Fidelity Global Dividend

Bigley argued the best complement to Capital Gearing was another defensive fund – Fidelity Global Dividend.

The £3.4bn portfolio is managed by Daniel Roberts and targets “well-established global large-cap companies from around the world”, he said. The fund has a relatively defensive positioning, with high allocations towards financials (25.8%), consumer products (19.4%) and industrials (18.2%).

Bigley added: “The yield of 2.6% currently on offer from this fund is modest versus other income strategies. However, the focus on dividends and dividend growth can enhance stability and provide diversification in an uncertain environment.”

For example, year-to-date the fund is up 6.5%, despite ‘Liberation Day’ tariffs which caused markets to nosedive. This is ahead of the IA Global Equity Income sector, up 0.3%, and the MSCI ACWI, which has slid 4.7% following market turbulence.

Performance of fund vs sector and benchmark YTD

Source: FE Analytics

This builds on a strong medium-term record for the fund, which ranked in the first quartile of the IA Global Equity income sector over the past one and three years.

JP Morgan Global Growth and Income

Ennion also recommended an equity income strategy: The JPMorgan Global Growth and Income Trust.

Managed by FE fundinfo Alpha Managers Helge Skibeli, James Cook and Timothy Woodhouse, it aims to beat the MSCI AC World index while providing a good yield, Ennion explained.

Over the past three, five and 10 years, it delivered top-quartile results in the IT Global Equity Income sector. Over the past decade, it surged 248.9%, the best return in the sector, beating the MSCI ACWI by more than 80 percentage points.

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

Source: FE Analytics

The trust is a high-conviction portfolio, which has been a challenge for the strategy recently, due to high allocations towards mega-cap tech stocks that have taken a hit this year. Despite this, Ennion argued the strategy remained a solid complement to Capital Gearing.

He said the emphasis on “superior earnings at reasonable valuations” as well as a 4.26% yield from both capital and income is a key selling point. “This is a combination that we believe enables the trust to achieve consistently good returns for clients," he said. Indeed, the trust has outperformed the MSCI ACWI every calendar year since 2019.

Additionally, with a 0.42% ongoing charges figure (OCF), Ennion argued it is a “relatively cheap way” for investors to access global equity markets.

It was easy to forget about regional diversification when the US was shooting the lights out and US exceptionalism seemed an innate advantage that would endure.

But this year, the S&P 500 has slid from the top to the bottom of the performance charts like in a game of snakes and ladders. 

As such, global equity funds that ignored their benchmarks (which had two-thirds to three-quarters in the US) and pursued a radically different approach to regional asset allocation were best placed to protect investors’ capital this year.

Geographical diversification would also have served investors fairly well over the past decade, as the table below illustrates. A broadly diversified portfolio with a substantial home bias would not have kept up with the S&P 500 but it would have outperformed all other major regions over 10 years.

The grey box in the table below represents a hypothetical portfolio with 25% apiece in the FTSE 100 and S&P 500, then 15% each in emerging markets and Europe ex-UK and finally 10% each in Asia ex-Japan and the TOPIX. By comparison, the MSCI All Country World Index had 64.6% in the US and 3.4% in the UK, as of 31 March 2025.

This diversified portfolio was not the best performer in any of the past seven full calendar years and it only came second once but, equally, it never incurred the worst losses and was only second-worst once. Overall, as mentioned above, its 10-year annualised return in sterling beat every other major region except the US.

World stock market returns vs a geographically diversified portfolio

Source: LSEG Datastream, MSCI, S&P Global, TOPIX, J.P. Morgan Asset Management. All indices are total return, data as of 29 Apr 2025.

Spreading an equity allocation across different regions can also help give investors a smoother ride, as their portfolio is not over-exposed to one market when economic shocks hit, said Natasha May, global market analyst at JP Morgan Asset Management.

“Take 2022: the UK stock market was one of the few regional indices to post a positive total return, as its defensive characteristics and high energy weighting helped returns during high inflation and rising interest rates. Broad regional diversification in this period would have helped limit losses in equity investors’ portfolios, more so than a fully benchmark-aligned strategy,” she explained.

“Investors should expect to experience periods in which one market outperforms for an extended interval. But over the long run, broad regional diversification has proved its worth in insulating equity portfolios from economic uncertainty and geopolitical shocks.”

Ultimately, the chart above suggests that instead of cherry-picking the best-performing market from here on, investors would be better off with a well-diversified portfolio – especially now, with the outlook for US equities being so uncertain.

Indeed, several asset managers have predicted that the US will be one of the worst-performing regional equity markets during the decade ahead.

Ninety One, for example, expects US equities to return 3.6% per annum on average in dollar terms for the next 10 years. This puts the US on a par with Europe ex-UK (in local currency terms), although Ninety One expects the UK, Japan and emerging markets to each deliver more than 5% per annum.

Dan Morgan, a multi-asset analyst at Ninety One, said: “US equities in aggregate now score poorly in many estimates of long-term equity returns, both in an absolute and relative sense, and investors are anticipating a continuation of historically exceptional outperformance of earnings growth well into the future.”

Ninety One’s 10-year local currency return forecast

Source: Ninety One. The chart shows the firm’s forecasts made in September 2024 and March 2025 for returns over the next 10 years. The March forecasts were published last week and have been adjusted upwards due to US equity valuations having moderated.

Morgan agreed with May that investors should diversify their portfolios far more broadly than the weightings of global equity benchmarks.

“On a more strategic investment horizon, it would certainly seem prudent to lean against the concentration in both large-capitalisation growth stocks and the US market to sustain an adequate level of diversification in equity portfolios, rather than let exposure to both drift even higher,” he said.

“Market-cap weighted benchmarks cannot be said to be sufficiently geographically diversified with close to 70% in a single market, even when that market is the US, which offers unparalleled breadth and depth of investment opportunities in companies exposed across all areas of the domestic and global economies. Another simple alternative, GDP weights, fails to account for the global business models of the majority of large, listed companies.”

Instead, Morgan suggested using dividends as a starting point. “For an income-focused investor, a more relevant metric could be the proportion of dividends derived from the US market, which has been very steady at around 40% of global dividends historically and is only slightly higher than this today, even after more than 15 years of US equity outperformance,” he said. A 40% allocation to the US might therefore “make sense as a neutral starting point”.

Stock markets around the world have been thrown into chaos during the first few months of this year as investors reacted to Donald Trump’s volatile policymaking and, most recently, the tariffs he announced on ‘Liberation Day’ on 2 April. 

As a result, many investors are likely to have experienced some gut churning volatility and a significant hit to their portfolios since the new president took office. 

Indeed, it’s precisely this type of market mayhem that has dyed-in-the-wool cash savers wagging their fingers and chiding “that’s why I don’t invest in the stock market!”

However, there are a number of investment trusts that are designed specifically for nervous investors and volatile times like these; they aim to preserve the value of investors’ capital during market downturns while providing cash-beating returns when stock markets are rising.

In the wake of the recent market volatility, I decided to take a closer look to see if their claims stood up to scrutiny.

One of the most prominent funds is Capital Gearing Trust. Founded in 1973, it has been a steward of investors’ capital through booms and busts, market crashes, global economic crises and a pandemic. Despite these hurdles, since Peter Spiller started managing it in 1982, the trust has only lost money in two years, with the worst annual loss being 4% in 2022.

Even so, if you had invested £10,000 at launch you would now have £2.2m sitting in your portfolio today, and with very little stress along the way.

For some more recent context, let’s look at the period of tariff-induced volatility caused by Trump’s tariff announcements. In the four weeks between 2 April and 29 April, the average investment trust rose by 1.8%, although that figure masks a wide disparity; the average North America trust is down by 6.8% and the average China trust down by 9.8% in those four weeks alone, while the average trust in the Global sector was down by 3.4%. Yet Capital Gearing Trust was exactly unchanged.

Other wealth preservation trusts did emerge with profits, with Personal Assets Trust up by 0.59% and Ruffer Investment Company gaining 1.08%.

Analysing performance over more meaningful periods shows that wealth preservation trusts have successfully protected investors’ savings through market wobbles, busts, corrections and crashes. All while passing on at least some of the upside when stock markets are doing well. Indeed, even during times of extreme market stress such as the financial crisis or the Covid pandemic, some of these trusts actually made money.

So how do they do it?

The truth is that there is more than one way to build a resilient, gravity defying portfolio, and each of these trusts takes a different approach. The one thing in common is a diversified pool of assets, at least one segment of which is designed to rise in value when equities are having a tough time. That might be gold, bonds, derivatives or a combination of the three. Either way, they interact with the rest of the portfolio in a way that protects the bulk of investors’ capital.

Spiller explains his method of dividing Capital Gearing into three pots: “We put approximately one third in risk assets such as equities, another third in index-linked bonds and another third in cash or cash equivalents such as high-quality government bonds, which pay a better return than cash on deposit.

“The result has been remarkably consistent. We sailed through the dotcom crash in 2000 and made money when the markets crashed during the global financial crisis and again during the Covid downturn,” he said.

The trust is not bulletproof, however. “A really big fall in US equities could still hurt us and there are no guarantees we won’t lose money,” Spiller acknowledged. “But our long-term record of safely growing our investors’ savings speaks for itself.”

Ruffer Investment Company also focuses on capital preservation and has performed well in turbulent markets, said manager Jasmine Yeo. “The strategy retains a defensive bias with powerful protections but we’ve also got high conviction growth ideas and lots of liquidity to take advantage of the opportunities which volatility bring. We’re trying not just to preserve and grow capital in real market stress, but to use profits from our protections and other liquidity to buy assets to drive the next cycle of returns,“ she explained.

“Our approach has been successful in helping us to protect our clients through the dotcom bust, the credit crisis and Covid-19. The portfolio was defensively positioned going into ‘Liberation Day’ holding potent derivative protections that contributed meaningfully to performance as volatility spiked, offsetting the falls in the portfolio’s equities, while our yen and precious metals exposure allowed us to make positive headway.”

Personal Assets Trust takes a different approach, according to its manager, Sebastian Lyon – focusing on high-quality equities but avoiding the derivatives used by Ruffer. “All the wealth preservation trusts do things in different ways, so I see us as complementary rather than in competition,” he said.

“We dismiss a huge pool of equities because they are too cyclical, too high risk. If you look back through history and see the companies that tend to fall a lot in a recession, there is a theme: time and again it tends to be highly geared companies like retail banks, whether during the Asian currency crisis in 1997 or after ‘Liberation Day’; HSBC, Standard Chartered, Barclays – all went down by around 10% in April.

“That’s why we don’t own these stocks. Nor do we own companies reliant on receiving new capital such as housebuilders or airlines because when things go wrong, profits can collapse really sharply, like they did during Covid, and they are forced to ask for more money at the bottom of the market,” he explained.

“What do we own? Consumer staples. Unilever is our largest holding. It’s boring and predictable and we have held it for 20 years. We like to stick to the middle ground where companies have a tailwind. We have owned Microsoft for many years and we like Visa and Amex because there is a clear tailwind in the trend away from cash.”

Personal Assets also has 11% in gold and gold-related investments. “We love gold because it has risen during every crisis, providing a fantastic safe haven as we’ve seen recently as it has hit successive record highs,” Lyon said.

So take your pick. As you can see from the graphics, all of these trusts have done remarkably well over the long term, smoothing out returns at times of extraordinary volatility, and giving investors a more profitable, arguably less stressful alternative to cash. So for those who want to sleep at night whilst preserving the value of their nest egg, these trusts are most certainly worth considering.

Annabel Brodie-Smith is communications director at the Association of Investment Companies. The views expressed above should not be taken as investment advice.

The US and China have issued a joint statement announcing a temporary reduction in tariffs, signalling a potential thaw in trade tensions. For a 90-day period, the US will lower tariffs on Chinese goods from 145% to 30%, while China will reduce its tariffs on US imports from 125% to 10%.

The news has been met with optimism by equity markets, with the US set for a strong start, as futures point to a 3.3% rise for the Nasdaq and a 2.5% gain for the S&P 500 when Wall Street opens later today, Russ Mould, investment director at AJ Bell, said. Asian and European markets have already responded positively, with Hong Kong climbing 3% and the Stoxx 50 index rising 1.4%.

“Lowering tariffs on Chinese goods from 145% to 30% is a big deal and one that significantly lessens the blow to the Asian economy,” he said.

“Trump has shown he is willing to reduce the severity of the Liberation Day tariffs and that has raised hopes for other countries to secure more favourable trade deals. All this points to the potential for a less severe hit to global trade and lower fears of recession. That in turn has put investors in risk-on mode.”

Investors have started to gradually move away from traditional safe havens, as gold (which gained around 40% in the past year) slipped to a one-week low and fell again in the wake of the positive outcome from the trade talks, said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

“The shared intention on both sides to reach a lasting agreement is evident – and that alone should help sustain the current positive momentum in markets,” she said.

“However, some of the optimism could wane if concrete plans to reduce tariffs don’t emerge. Today’s ‘deal’ just heralds the start of a series of negotiations.”

Doubts about how far the deal would actually go were widespread. Any lack of concrete progress in the next 90 days within the scope of the deal will likely just ramp up market tensions once again, according to Lindsay James, investment strategist at Quilter.

“We have seen tariffs suspended only to be reintroduced after subsequent negotiations weren’t seen to be progressing adequately and early trade deals have been announced with fanfare only to be later ripped up,” she said.

Jean-Louis Nakamura, head of conviction equities at Vontobel, has two predictions as to how the summer months might play out.

“In the next two months, we might attend a tug of war between pre-announcements of more sustainable and comprehensive agreements, closer to the initial starting situation, and hard data suggesting a rapidly deteriorating internal demand in the US and exports dynamic in China,” he said.

“If the latter come first, markets should experience another large bout of volatility.”

For Stuart Rumble, head of investment directing, Asia Pacific, at Fidelity International, these announcements won’t reverse the damage done so far.

“Even with these tariff cuts, much of the shift in global trade flows has already begun. Tariff differentials remain relevant and will continue to shape trade flows based on relative competitiveness, infrastructure capacity, and domestic policy responses,” he said.

“While encouraging, this development perhaps should be seen by investors as an easing of tensions within a broader, long-term shift in the US-China relationship towards greater self-sufficiency.”

For now, however, “sentiment may matter more than substance”, he concluded.

A recession in the US might feel like a far-off event for UK investors, but as the old adage goes, ‘when America sneezes, the rest of the world catches a cold’.

The question of whether the US economy is heading for a recession has become a pertinent one, ever since Donald Trump’s ‘Liberation Day’ tariff announcement on 2 April kicked off a stock market sell-off and led to concerns about price rises and the future health of American businesses.

If the US were to plunge into a recession, and if the American stock market tumbled as a result, it could cause a harsh downturn in many investors’ portfolios, as the high US equity allocations that served them well in recent years backfires.

Indeed, the US occupies more than 70% of the MSCI World index and is home to many of the most popular companies amongst global investors’ portfolios, such as Alphabet, Microsoft, Amazon and Apple.

As a result, investors and fund managers are debating whether a recession could occur in the US this year and assessing whether their portfolios are positioned for this eventuality.

Below, Trustnet asks experts whether they expect a recession to unfold.   

JP Morgan Chase – 60% chance of recession

Bruce Kasman, chief global economist at JP Morgan, believes there is a 60% likelihood of a recession this year.

Even after the 90-day pause on ‘reciprocal tariffs’, the universal 10% tariff and the escalating trade war with China could cause a tax hike worth 3% of US GDP – the largest domestic tax rise since the Second World War.

While Kasman conceded that recessions were inherently unpredictable, and not all of this tax rise would be paid, “what remains is still enough to push the US and China — and thus likely the global economy — into a recession this year”, he said.

This will impact the direction of monetary policy. He does not expect the Federal Reserve to begin cutting rates until September, at which point he anticipates “further rate cuts at every meeting thereafter through January 2026.”

Marlborough – Recession is the endgame

Recessions are inevitable, according to James Athey, fund manager at Marlborough. “If someone asks you, ‘will there be a recession?’ the only valid response is ‘over what time horizon?’” he said.

Attempting to time a recession is difficult, but recessions are ultimately a “self-fulfilling prophecy”, he continued. As consumer confidence starts to fall, people will spend less and unemployment will rise, rapidly moving into a recessionary environment. Consumer confidence has already fallen to a level “historically only associated with the worst global crises” and he expects it to deteriorate further.  

“For now, the base case must be that we are in the late stage of a cycle. From here, a recession is the endgame,” Athey concluded.

Wellington Management – The US may already be in recession

Paul Skinner, investment director at Wellington, argued the spike in policy uncertainty is already impacting cyclical data and could easily spiral further. For example, he pointed to the Conference Board Consumer Confidence Index, which fell to its lowest level in five years last month.

The potential for higher inflation due to tariffs has forced the Federal Reserve to delay any further interest rate cuts, adding to market uncertainty.

While he conceded that a more positive resolution to trade negotiations could change things, mutually acceptable solutions for countries such as Europe and especially China will take time. As a result, investors should expect the near term to remain challenging.

“There is a reasonable chance that the US economy is already in recession,” he concluded.

Columbia Threadneedle – The US is embarking on an act of economic self-harm

For Anthony Willis, senior economist at Columbia Threadneedle Investments, the risk of recession is rising but it is “not our base case, for now”. Stagflation (stagnant economic growth combined with high inflation and rising unemployment) is the more likely outcome, he said, predicting sluggish US economic growth of 0.5% and unemployment increasing to 4.7%.

The US is embarking on an “act of economic self-harm” with Trump's volatile approach to tariffs and trade, he argued. This comes at a time when US exceptionalism is being increasingly challenged, as investors begin to worry about government deficits, high valuations and business confidence.

“Consumer sentiment data is very soft across all income levels. The Conference Board numbers are weak and closing in on pandemic levels and the University of Michigan survey of consumer sentiment is close to all-time lows. Worries over employment stand at levels normally seen only in recession.”

Nevertheless, Willis noted that soft data does not always translate into economic weaknesses. While volatility is likely to persist, the hard data does not currently point to all-out inflation, he said.

Stonehage Fleming – Preparing for a soft landing

Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas fund, is at the optimistic end of the spectrum and expects the US to experience a soft landing this year.

“The first point to make is that the hard economic data remains very firm,” he said. Indeed, the US employment figures released in April were supportive, with a larger increase in payrolls, stable levels of unemployment and solid earnings. The US consumer, it seemed, is in a relatively healthy place.

Smit added that the ratio of job openings to unemployment was currently around 1.07, indicating there are more openings than unemployed people, a positive sign for the economy.

He argued that if not for the soft data of tariffs, we “wouldn’t even be having this discussion about a recession”. Tariffs, he conceded, are undoubtedly disruptive and investors are waiting with bated breath in terms of how the 90-day negotiations will go. However, he said that “if nothing changes from here, the hard data will probably remain supportive”.

European funds have produced the best returns of any regional equity sector this year, apart from Latin America.

Even amid Donald Trump’s tariff onslaught, the continent has prospered as some of the headwinds it faced last year dissipated and tailwinds emerged, according to James Piper, fund analyst at FE Investments. German commitments to increase spending on infrastructure and defence have provided a boost to the economy, inflation is more stable and interest rates are coming down, he said.

Performance of top five IA sectors YTD

Source: FE Analytics

Within the competitive European equity space, three strategies stood out to fund selectors: Lightman European, Liontrust European Dynamic and BlackRock Continental European Income.

Performance of funds vs sector over 5yrs

Source: FE Analytics

Liontrust European Dynamic

FE Investments added Liontrust European Dynamic to its portfolios a year ago. The £1.9bn fund’s flexible, adaptable process enables it to consistently navigate difficult periods, Piper said.

Managers James Inglis-Jones and Samantha Cleave look at ‘market regime indicators’, including valuations, investor anxiety, corporate aggression and market momentum, to ascertain which style of investing will be rewarded. Then they adjust their exposure between contrarian value, value, growth and momentum bets.

As such, this fund might suit investors who want balanced exposure to European equities, said Martin Ward, senior investment research analyst at Square Mile Investment Consulting & Research, because “it should not be overly beholden to style shifts within markets”.

“We like the managers’ strict adherence to their process, but this can mean that there will be periods where the market does not reward their stocks,” he pointed out.

Bestinvest introduced Liontrust European Dynamic to its Best Funds list last year. Managing director Jason Hollands said the strategy has a well-established team and delivered outperformance in both value and growth-led markets.

“At the heart of the investment process is a focus on free cashflow analysis, which the team believes is a key building block of long-term growth that is often underappreciated by investors who instead often put too much store on profit forecasts. The managers believe that cashflow is a far more reliable guide to future profitability,” Hollands explained. 

Richard Philbin, chief investment officer (investment solutions) at Hawksmoor Investment Management, said the fund has about 35 holdings but its top 10 comprise less than 40%, which “suggests a relatively flat portfolio”. The fund has about two-thirds in large-cap stocks and the remaining third in small- and mid-caps.

“It doesn’t really take massive positions away from the index,” he continued. “Its largest overweight at sector level is consumer discretionary (22% versus 10% for the index) and the largest country allocation is an underweight to Germany (9% versus 19.5%).”

Liontrust European Dynamic is the second-best performing fund in its sector over 10 years to 8 May 2025 and the third-best over five years.

Lightman European

Lightman European is a value fund but, like Liontrust, its managers adapt along with the market cycle. Manager Rob Burnett dials the value factor up and down depending on his bullishness and this macro-awareness has enabled him to ride out periods when value investing has not been in favour, Piper said.

Burnett and George Boyd-Bowman focus on the bottom 20% of their investable universe by valuation and look for catalysts that will spark a turnaround, he added.

Philbin said Lightman European has a concentrated portfolio of 40 to 50 holdings, with about 40% in the top 10. “The managers are not afraid to take large positions against the benchmark from both a country and sector perspective,” he noted.

The strategy has a bias towards higher yielding stocks. “The fund has a yield of around 4.5% for this year and is forecasting almost 5% for next year. This is also done with a portfolio price-to-earnings ratio less than the market,” Philbin explained.

The £934m fund is the fourth-best performing fund in its sector over five years but slipped to bottom quartile over three years.

BlackRock Continental European Income

AJ Bell uses BlackRock Continental European Income in its income portfolios and as a core holding for portfolios with a smaller allocation to Europe, where only one fund is needed.

Head of investment research Paul Angell said: “The managers of this fund prioritise downside resilience within their companies, as they look for quality businesses paying healthy dividends. Holdings are categorised across high yielders, compounders and high quality franchises.”

Tom Bigley, fund analyst at interactive investor, said the fund’s quality bias and style-agnostic approach means its returns differ from most equity income peers, which tend to have a value bias. The fund invests in quality businesses with strong corporate governance, a robust competitive position, earnings stability and sustainable and growing dividends, he said.

“The portfolio is constructed with a degree of pragmatism, tilting towards either stocks featuring above-average dividends or stocks growing their dividends, depending on the opportunity set and expected risk/reward,” Bigley explained.

“The managers' approach leads to a steadier return profile and to outperformance during periods of market weakness, with strong risk-adjusted returns when compared to both peers and the benchmark. The fund is currently yielding just over 3.4% and has historically beaten the yield of the benchmark by 50%.”

BlackRock Continental European is the six-best performing fund in sector over 10 years to 8 May and it is also top-quartile over 12 months. Its three- and five-year total returns are below the sector average, however.

The team changed last year with Stuart Brown joining from Aberdeen to replace Andreas Zoellinger, who is retiring. Co-manager Brian Hall remains in situ.

Angell said the change has been well managed with an extended handover period. The fund also benefits from BlackRock’s deep pool of European analysts, he noted.

Piper thinks Brown will be able to improve the fund. Since joining, he has made changes that have introduced a different element of diversification and he has deep knowledge of all the stocks within the portfolio, the FE Investments analyst said.