Stock market volatility is causing Schroders’ value managers to find opportunities in areas of the market they have not touched in years.

For many years, luxury brands such as LVMH and Gucci were excluded from the team’s investable universe, as they tended to be popular stocks on high starting valuations.  

However, the fortunes of luxury good stocks have taken a turn for the worse, with the MSCI ACWI/Textiles Apparels and Luxury Goods index down by 5.1% over the past three years, significantly underperforming the broader MSCI AC World.

Performance of indices over 3yrs

Source: FE Analytics. Total return in sterling.

This underperformance has continued to build, with luxury good brands threatened by US president Donald Trump’s tariff announcement in April. Combined with poor sector earnings, luxury goods giants such as LVMH fell as much as 30% this year.

Share price performance of LVMH over 1yr

Source: Google Finance

However, Andrew Williams, investment director in Schroder’s global value team, said the declining valuation of these stocks in recent years is a signal that the “market often gets ahead of itself”.  As a result, the value team is now finding that luxury goods are back on the radar due to newly distressed valuations.

“For the first time in all the years I’ve been doing this, we’re looking at luxury stocks again,” he added.

For example, the Schroder Recovery fund – one of the most “pure reflections” of the team’s approach – has a prominent position in UK fashion giant Burberry, which has experienced some very challenging recent years.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said earlier this year: “Burberry is dealing with difficult conditions in the mid-market luxury sector. It doesn’t have the same pull as its ultra-luxe rivals and aspirational shoppers are more cautious, without the deep pockets of wealth to keep them insulated.”

The share price has therefore been volatile in recent years, with the stock experiencing major downturns in early 2024 and 2025. However, Schroders’s position in the stock is paying off this year, with Burberry introducing a large-scale cost-cutting strategy under the new chief executive and delivering earnings above expectations.

So far this year Schroder Recovery is up 13.7%, the eighth-best result in the IA UK All Companies sector. This is also a better return than the FTSE All Share, in part due to many of the strategies' recovery situations building momentum in their turnarounds.

Performance of Schroder Recovery vs sector and benchmark YTD

Source: FE Analytics. Total return in sterling

Across the luxury goods market more broadly, however, there are plenty of compelling value opportunities.

Several retail conglomerates, particularly in Europe, have evolved into more focused luxury groups with high-end brands, but are being generally misjudged by the market.

“While there are risks to these [luxury stocks], such as uncertainty around tariffs and a less-than-pristine balance sheet, we believe these are more than accounted for in the current valuation,” Williams said.

The decision to add Burberry and consider buying further luxury good stocks reflects the Schroder team’s value approach. It targets just the cheapest 20% of companies on the market, based on the belief that those businesses will deliver the greatest outperformance.

Williams explained: “When you buy things when they’re cheap, it feels like the worst time to be investing. But for your financial health, it’s the period of maximum opportunity.”

It should be noted that value investing has been out of favour in recent years, due to the spectacular returns that investors would have gotten by pursuing growth. “Between 2013 and 2020, until Covid really, there was not enough volatility in the stock market” for value investors to find mispriced opportunities, the investment director said.

Indeed, looking at the performance of the two indices over the past 15 years to include this, the MSCI ACWI Growth index is up 547.8%, almost double the performance of its value counterpart, as demonstrated by the chart below.

Performance of indices over the past 15yrs

Source: FE Analytics.

 However, Williams argued that because growth investing has outperformed recently does not mean investors should ignore the value opportunities in areas such as luxury.

“As people, we get too greedy when stocks go up and we buy at very high prices, and we get too fearful when stocks go down and we sell off, irrespective of what is going on,” he argued.

But currently top-performing stocks are unlikely to outperform forever, he said. Meanwhile, over 150 years of market developments, including the computer, world wars and financial crisis, buying the cheapest companies on the market generally leads to better returns, as seen in the chart below.

10-year annualised return from different starting P/E’s

Source: Schroders. Data based on US equity market since 1871.

“While the questions of what happens next can be important, the most crucial question is simple,” Williams finished. “You need to ask how much the business is worth. That will determine your future returns.”

China is the largest weighting in the MSCI Emerging Markets index, but the Ashoka Whiteoak Emerging Markets trust is keeping its direct exposure relatively low – and not because of a bearish macro view.

Loong Lim, investment director at the trust, said that both corporate governance and country-level concerns were holding them back from building a significant position in Chinese stocks.

“There are a lot of companies out there, but corporate-level governance is quite poor on average,” he said. “They just don’t understand what shareholders are and the purpose of them, even though they’re listed companies.”

Its authoritarian regime also makes China too unpredictable.

As a result, the trust’s allocation to China and Hong Kong stands at 23.1%, over six percentage points below its benchmark, the MSCI Emerging Markets index. Of that 23.1%, only 2% is invested in state-owned entities, versus 8% of the benchmark.

Instead, it looks for economic exposure to China through developed-market companies that generate a high share of their revenues in the region.

Regional composition of Ashoka WhiteOak Emerging Markets
Source: Ashoka, Bloomberg.

“We said, is there a way to get economic exposure to China without taking on either country-level or corporate-level governance risk?” Lim explained.

Names like LVMH and Hermès (combined, they make up a 0.8% weighting in the trust) get most of their revenues from emerging markets, and within that, China is by far the biggest part.

“This also applies to their international revenues – just go down to Bond Street and look at the people queuing up to go into LVMH and Hermès,” he said. “They are Chinese tourists most of the time.”

The same logic applies to other parts of the portfolio. Ashoka White Oak’s exposure to Taiwan, for instance, is below the benchmark (14.4% versus 17%) not because of concerns around Taiwanese companies, but due to geopolitical uncertainty. “The issue with Taiwan for us is geopolitical risk. It happens to be across the street from China, and every morning Xi Jinping thinks about reunification,” said Lim.

At 7.9%, Taiwan Semiconductors is the largest position in the portfolio but remains below the 10.2% allocation of the MSCI Emerging Markets index. The decision to hold less than the benchmark reflects opportunity costs, not any negative view on the company, Lim explained.

“If our analyst felt the risk/reward in TSMC was particularly attractive, we’d be open to taking it up to 10%,” he said. “But right now, it’s a trade-off. We like the business a lot but allocating more would mean 1.8% less to invest elsewhere. It’s not about TSMC itself – it’s just that we’re seeing other compelling opportunities too.”

So the trust seeks indirect exposure where possible. “What way is there of gaining semiconductor exposure without taking on that risk?” the investment director asked.

“[Dutch semiconductor companies] ASM International and ASML, as well as the Japanese Disco, for example, sell mostly to Taiwan and Korea, giving you that emerging markets exposure and that economic theme, but without taking on the geopolitical risk.”

Performance of fund against index and sector over 1yr

Source: FE Analytics

Developed-market stocks make up 10.9% of the trust, with each one having to meet three criteria: at least half of its value must come from emerging markets (typically via revenues or profits), it must be an alpha opportunity in its own right, and it must help reduce a portfolio risk that can’t easily be managed through direct emerging market holdings.

“We’re not just going to buy a developed-market company for the sake of it,” said Lim.

Despite these high-level considerations, the fund relies entirely on bottom-up stock selection, not macro calls, to drive returns.

“We’re not macro guys. We’re not economists. We have no ability to forecast any kind of macro event – election, oil price, anything like that,” Lim said. “All our alpha comes from stock picking. Everything else is a factor risk we try to mitigate.”

Last week, Ashoka WhiteOak Emerging Markets featured on Trustnet among the trusts worth their premiums.

Short-sellers are still betting heavily against the UK consumer, data from the Financial Conduct Authority (FCA) shows, although the biggest short on the UK market is a pharmaceutical firm that specialises in treatments for addiction.

Investors must publicly report short positions in UK-listed stocks that exceed certain thresholds to the FCA, to increase transparency and allow potential manipulation or systemic risk to be monitored.

Any short position that reaches or exceeds 0.1% of a company’s issued share capital must be privately reported to the FCA while positions of 0.5% or more must be publicly disclosed via the FCA’s website.

This regime allows market participants to see which stocks are being heavily shorted and by whom, offering a window into institutional sentiment and positioning.

According to the FCA’s data, mid-cap pharmaceutical company Indivior is currently the stock with the most disclosed shorts against it: 6.51% of its shares. Millennium International Management, Arrowstreet Capital, Numeric Investors and Qube Research & Technologies each have short positions of more than 1%.

Indivior focuses on treatments for addiction and mental health disorders, particularly opioid use disorder, and its core products include Suboxone and Sublocade, both used in medication-assisted treatment (MAT) for opioid dependence.

Source: Financial Conduct Authority, as at 7 Jul 2025

The firm was spun-out from Reckitt Benckiser in 2014 and has a secondary listing on the London Stock Exchange, but this will end on 24 July to maintain a sole listing on Nasdaq. This reflects that most of its revenues and shareholders are in the US.

The company’s latest results show net revenue fell 6% in the opening quarter of 2025, while net income was down 23%. Other issues likely eyed by short-sellers include US litigation and legal exposure from past Suboxone marketing practices, generic competition to Suboxone, challenges to the growth of its Sublocade injectable treatment and a relatively narrow product base.

The second most-shorted stock is Primary Health Properties, according to the FCA’s disclosure data. Some 6.48% of its shares are being shorted by the likes of Glazer Capital, Mirabella Financial Services, Clearance Capital and Sand Grove Capital Management.

Primary Health Properties is a real-estate investment trust that owns and manages a portfolio of primary care medical centres, typically leased to GPs, the NHS or health authorities. Its long-term, government-backed leases provide predictable income and make it popular among income-focused investors, although its bond-like characteristics have made it vulnerable in a rising interest rate environment, as higher yields elsewhere reduce its relative appeal.

The REIT is in a bidding war against US private-equity firm KKR and infrastructure investor Stonepeak to take over rival Assura, which has a similar mandate. If the deal went through, it would create a £6bn healthcare property portfolio.

However, the Competition and Markets Authority said last week that it is investigating the anticipated acquisition to determine whether it could lead to “a substantial lessening of competition” in the space.

In third place is uranium investment firm Yellow Cake, which was the most-shorted stock last month. Uranium is volatile and sensitive to sentiment, although it has been rising in recent weeks, and funds exposed to the commodity were some of the best performers in 2025’s second quarter.

Other commodity names on the most-shorted list include Hochschild Mining and Petrofac.

But a recurrent theme among the FTSE’s biggest shorts in recent years has been the UK consumer under pressure. Several companies on the above list are tied to the health of the consumer, such as Ocado, Boohoo, ASOS, Kingfisher, Domino’s and J Sainsbury.

The UK retail and consumer discretionary sector is facing a squeeze from both ends: stubborn inflation has eroded real wages while interest rates remain high, dampening non-essential spending from consumers. As a result, footfall and basket sizes are down, particularly in mid-market and online-focused segments.

At the same time, cost pressures, especially from wages, energy and logistics, have compressed margins across the supply chain. Retailers have limited pricing power in this environment, forcing them to discount or absorb costs, which undermines profitability.

In Ocado’s case, persistent losses and an unclear path to profitability amid high capital intensity and tech execution risk have long attracted scepticism. Boohoo and ASOS continue to suffer from margin compression, excess inventory and weaker online apparel demand.

In a similar vein, UK travel and hospitality stocks like Wizz Air and Whitbread are being shorted. While demand has rebounded since the Covid pandemic, input costs such as fuel and wages, capacity constraints and the consumer squeeze still affect them.

Wizz Air recently reported a significant drop in profits on the back of longstanding supply chain issues grounding a large share of its fleet and conflict-related disruption to the routes it operates in Ukraine and the Middle East.

Meanwhile, Whitbread recently reported a 3% fall in UK like-for-like sales at the start of its financial year amid a “challenging” UK market. The group started a restructuring in April last year that involves converting 112 branded restaurants into new hotel rooms while selling another 126 restaurants.

With US president Donald Trump shaking up trade, diplomacy and the post-war global order, Europe is set to benefit from investors’ rotation away from North America – and there are several funds that the experts think could benefit from this.

With European GDP projected to grow, inflation expected to decline and freshly tilled trade agreements with the world beyond the US, Trustnet has asked fund pickers for their favourite portfolios set to capitalise on European recovery.

Alex Watts, senior investment analyst at interactive investor, noted that Janus Henderson’s The European Smaller Companies Trust has a strong track record investing in small- and mid-caps in Europe excluding the UK.

Managed by Ollie Beckett, alongside deputy managers Rory Stokes and Julia Scheufler, the trust spans 120 diverse companies – from early-stage to turnaround plays.

Industrials and telecom, media and technology make up nearly half of the portfolio. Although 2024 ended on a sour note for European industrials, 2025 so far has been a different story, with top holdings such as TKH and KSB demonstrating a solid performance, “tying into the story of an uptick in European manufacturing and industrial production”, Watts said.  

Despite higher volatility than its benchmark (23.2% annualised), the trust has outperformed over 10 years.

Performance of trust vs sector and benchmark over 10yrs

Source: FE Analytics

Matthew Read, senior analyst at QuotedData, flagged Fidelity European Trust as an attractive fund that “looks well-positioned to harness Europe’s long-awaited recovery”.

He noted that the trust has one of the strongest long-term performance records in its peer group, tending to target a blend of resilient European global champions, such as SAP and Novo Nordisk.

Performance of trust vs sector and benchmark over 10yrs

Source: FE Analytics

The trust’s planned merger with Henderson European Trust could create a £2.1bn powerhouse that is better resourced to capture US rotation flows, said Read.

“This should help keep the discount narrow, but shareholders also have the comfort of the trust’s policy to maintain the discount in single digits in normal market circumstances,” he added.

Read also flagged Baillie Gifford European Growth as well-positioned to benefit from Europe’s long overdue recovery.

“The trust is the most growth-focused of its peers and, following a bumper period during Covid, this has weighed on its performance during the last four years, leaving it on a circa 9% discount – the widest in its peer group,” said Read.

With the narrative around Europe shifting, Baillie Gifford European Growth offers a portfolio trading at a discount that is focused on high-quality franchises with underappreciated structural tailwinds that Read argued should be able to surprise on the upside.

Baillie Gifford European Growth’s top ten holdings as of 31 May 2025

Source: FE Analytics

“If the recovery doesn’t play out, shareholders also have the comfort of a 100% tender offer if [the trust] fails to outperform its benchmark over the four years to the end of September 2028,” Read noted.

For a more concentrated portfolio, Jason Hollands, managing director at Evelyn Partners, picked Liontrust European Dynamic – a fund with up to 35 holdings, managed by James Inglis-Jones and Samantha Cleave.

“The managers believe that cash flow is a far more reliable guide to profit forecasts,” said Hollands, noting that this approach is often underappreciated by investors who instead put too much store on profit forecasts.

The fund blends cash flow screening with proprietary indicators like investor anxiety and corporate aggression to target either growth or value, Hollands explained.

“This approach has delivered very strong results and, importantly, delivered outperformance in both value and growth-led markets.”

Hargreaves Lansdown senior investment analyst Kate Marshall has earmarked BlackRock Continental European Income as an attractive choice.

“It isn’t your typical value fund, but its focus on income does mean it leans towards value at times,” Marshall said.

Co-managed by Brian Hall and Andreas Zoellinger, the fund aims to provide investors with an attractive income alongside growth in their investment, targeting both growth and value stocks.

It currently invests around 60% across financials and industrials businesses, which has helped the fund’s performance so far this year.

Performance of fund vs sector and benchmark YTD

Source: FE Analytics

With so much geopolitical and economic volatility and uncertainty, dynamism holds its appeal. As such, Hollands also favours BlackRock European Dynamic.

The fund is managed by Giles Rothbarth, who Hollands labelled “one of the best younger fund managers in the City of London”.

Rothbarth has built the portfolio around a core of European high-quality stocks he believes can provide growth over the long term. “But he will rotate the portfolio into different types of companies depending on his shorter-term view of the market,” Hollands said.

BlackRock European Dynamic is ‘A’-rated by Square Mile, with the research house’s head of fund origination Amaya Assan also pointing to its flexibility.

“The fund is not constrained to a particular style of investing and its manager can dramatically change its stylistic, investment sector and market capitalisation positioning to take advantage of any opportunities that may arise,” she said.

Hargreaves Lansdown’s Marshall is also of the opinion that smaller companies often “do better” during economic recoveries because they are more flexible and typically more closely tied to the domestic economy.

“Barings Europe Select Trust is different from many other European funds,” she said.

It invests in small- and mid-sized companies with a ‘growth at a reasonable price’ investment style – meaning the managers, led by Nick Williams, are investing in companies they believe can grow earnings steadily but where the shares can be bought at a lower price than the earnings potential suggests they should be, she said.

With over three decades of experience investing in Europe, Williams has an “expert knowledge of the wider European market”, Marshall said.

The trust holds a ‘AA’ rating from Square Mile.

“Historically, the smaller cap segments of the European stock markets have provided plenty of opportunities for active managers to add value and this area should further benefit as and when investor sentiment starts to turn in its favour,” said Assan.

BlackRock has signalled a shift in its investment strategy, turning tactical and focusing on the short term in the belief that long-term investing frameworks are vulnerable in today’s volatile environment.

In the latest commentary, BlackRock Investment Institute head Jean Boivin said the asset management giant is “investing in the here and now – and putting more weight on our short-term views” as recent shocks to inflation, policy and fiscal sustainability have made traditional long-term signals less reliable.

Markets have faced a series of disruptions in 2025, from new US tariffs, persistent inflation and shifting central bank narratives. BlackRock views these as symptoms of a deeper breakdown in the macroeconomic structures that have guided investors for years.

“Long-term macro anchors that markets have relied on for decades, like stable inflation and fiscal discipline, have weakened,” Boivin said.

As a result, the firm is tilting away from an emphasis on long-term, strategic positioning. “In this volatile environment, we think it is important to carefully manage macro risk: set-and-forget portfolios no longer serve investors well,” Boivin said.

Rather than depending on broad macro forecasts, BlackRock is leaning on what it calls “immutable economic laws” to guide near-term decisions. These include structural limits on supply chains and the US government’s continued dependence on foreign financing.

“We see immutable economic laws limiting policy shifts and narrowing near-term outcomes: supply chains can’t be rewired overnight and US debt sustainability relies on large foreign funding,” the strategist explained.

These constraints, he argued, provide more clarity in the near term than longer-range projections.

At the same time, BlackRock is turning to five ‘mega forces’ – AI and digital disruption, demographic divergence, geopolitical fragmentation, the future of finance and the low-carbon transition – as long-term thematic drivers.

“Mega forces offer a new anchor for returns,” Boivin said, though he cautioned they do not map neatly onto growth or inflation outlooks.

“They don’t provide a clear handle on the growth and inflation outlook, unlike macro anchors, and don’t map into broad return drivers,” he explained.

“Instead, we need to track their evolution across and within asset classes, get granular with themes and constantly adapt to what’s priced in.”

BlackRock said there is a growing opportunity for active investors as market dispersion increases. “Greater dispersion in market and security returns means more opportunity to capture alpha,” Boivin said.

In terms of positioning, the firm remains overweight US equities, citing AI as a key earnings driver and suggesting US stocks are best positioned to lead in the current cycle.

“We think US equities will regain global leadership as the AI theme keeps providing near-term earnings support and could drive productivity in the long term,” the firm said.

In addition, the Trump administration is planning tax and regulatory reforms that would bolster investor sentiment towards the US, including the permanent lowering of the corporate tax rate to 21%.

Although European equities are outperforming US stocks over 2025 so far, Boivin noted that past reversals in favour of Europe have “always faded”. He suggested Europe needs to advance its structural reforms to change that trend.

Elsewhere, BlackRock favours Japanese equities, short-term US treasuries, agency mortgage-backed securities and eurozone government bonds.

In contrast, it is underweight long-term US treasuries, citing fiscal deficits and inflation pressures: “Persistent budget deficits and inflation pressures could drive term premium up over the long term.”

The investment house is neutral on several assets, including UK, European and emerging market stocks as well as fixed income from many of these areas.

Since the global financial crisis, the US high yield market has undergone a structural evolution driven by low interest rates and regulatory changes.

New issue volumes increased dramatically after 2008 as financing costs for high yield companies declined, attracting more diverse and sophisticated companies. Amongst the largest issuers today are recognised brands and global leaders including Charter Communications, Hilton Hotels and Carnival Cruise Lines.

Meanwhile, regulatory changes have been successful in encouraging more sophisticated borrowers into the market, attracted not only by cheaper rates but also the additional flexibility that high yield bonds give companies around their financing needs.

This new supply has been met by increased investor demand given attractive yields relative to other parts of the fixed income spectrum, with traditional buyers of US high yield such as mutual funds, pension funds and insurance companies all increasing their exposure in the post- global financial crisis decade.

Source: JP Morgan Research: 1) Credit Strategy Weekly as of 31 December 2024; 2) high yield Bond and Leveraged Loan Market Monitor as, of 30 April 2025.

Improved ratings mix

Coinciding with this growth has been a shift in the credit quality of the US high yield market, with the amount of BBs (at the highest end of the high yield rating spectrum) growing from 38% pre- global financial crisis to 53% today, at the expense of the CCC and below rated issuers (the lower end of the spectrum), which today account for just 11% of the market.

This trend has accelerated since 2020 and reflects the scale of credit improvements made by high yield issuers – using the initial fall in interest rates to push out maturities and refinance at low levels. This allowed many high yield companies to use the extra cash to reduce leverage and improve interest coverage.

Consequently, the market has witnessed record amounts of rising stars moving from high yield to investment grade, with $282bn of rising stars elevated between 2022 and 2024 compared with $37bn of fallen angels moving the other way.

Declining defaults

This trend is also significant in accounting for the declining US high yield default rate over this period. Since the pandemic-induced peak of 6% (excluding distressed exchanges), the par-weighted 12-month trailing high yield bond default rate has declined to just 0.3% as of April 2025 (or 1.3% including distressed exchanges).

Historically, the CCC portion of the high yield market has accounted for the vast majority of defaults – so the better ratings mix today provides a healthy starting point when thinking about where the default rate goes from here. 

Furthermore, there has been growth in the proportion of high yield new issuance that is secured (first or second lien), which has priority over unsecured debt in the capital structure due to being backed by underlying assets.

This offers higher recovery rates to creditors, which acts as compensation for lower coupon rates. The surge in secured issuance, which makes up nearly one-third of today’s US high yield market, is one of the ways in which issuers have adapted to the higher interest rate environment since 2022, allowing them to minimise interest expense.

A new normal for spreads?

During April’s tariff-related volatility, US high yield spreads widened by 103 basis points (bp) in two days – one of the largest two-day moves outside of the 2008/2009 crisis. Suddenly, investors were faced with that age-old quandary: buying opportunity or worse still to come? After a strong two-year rally, many had been waiting on the sidelines for such an entry point. Yet spreads rallied back strongly.

What comes next? Did the entry point come and go in the blink of an eye? April’s peak came close to the post-crisis average of 465bp but was still comfortably within the non-recessionary historical average spread of 496bp.

However, given the structural changes in US high yield market composition, comparing spread levels today with longer-term historical averages may be inherently flawed, even if recent ranges have been expensive relative to any yardstick. Putting a number on what the ‘new normal’ average high yield spread might be over the next 15 years is anyone’s guess, but there is a fair argument to suggest that it will be lower again than the previous 15 years.

This is not only due to factors above, but also due to improvements in liquidity made possible by electronic trading and portfolio trades, which have partly facilitated a decline in high yield bid-ask spreads. Meanwhile, due to shifting dynamics across the leveraged finance landscape, stressed issuers across both the high yield bond and BSL (broadly syndicated loans) markets that may have gone on to default in the past now have the backstop of accessing capital flowing in from private credit. This has contributed towards a lower default rate, but it could also drive coupons down in the future.

With fundamental and technical factors still proving supportive, on current reading we do not see the high yield default rate picking up to levels higher than long-term averages – even with heighted uncertainty on the macro front. In this scenario, spreads should continue to find support from buyers on any widening, as happened towards the end of April and into May.

Today’s US high yield market can be characterised by improved overall credit quality, better liquidity, lower duration and a higher proportion of secured bonds than 15 years ago. We feel that, together, these factors have rendered the old stigma associated with the high yield market obsolete. Maybe, just maybe, it can shake off the junk bond reputation for good over the coming decade.

Jack Stephenson is a US fixed income investment specialist at AXA Investment Managers. The views expressed above should not be taken as investment advice.

Investment trusts are the premier way to invest in smaller companies in the UK, according to Richard Staveley, manager of the Rockwood Strategic Trust.

As a way of gaining exposure to UK small caps, trusts are a “much more appropriate structure” and will generally work out better for investors over the long-term.

Indeed, the average strategy in the IT UK Smaller Companies Sector outperformed its open-ended counterpart by almost 190 percentage points over the past 20 years, as seen in the chart below.

Performance of indices over the past 20 years

Source: FE Analytics

This is primarily an issue of liquidity, Staveley explained. Because a trust is closed-ended, investors trade shares on the stock exchange rather than withdrawing money from the trust itself. This allows the manager to hold less liquid assets, such as smaller companies, without being forced to sell to meet redemptions during periods of volatility.

As a result, trusts can take more long-term, high-conviction positions in companies that may take several years to grow. There is a “size effect” in investing, where the bottom 2% of the market outperforms the bottom 10%, which in turn beats mid-caps and so on, because these companies are growing from a smaller base. However, investors will only notice this if they can take a genuinely long-term approach, he said.

By contrast, modern open-ended investment companies (OEICs) have become “very dependent on liquidity management” partially due to investors' desire to be able to “pull out their money at a second’s notice”. OEICs can often become “forced sellers” as a result, needing to reduce positions they still believe in, to be able to pay sudden redemptions.

“If a manager is worried that in their first year or two, they’ll be asked to take the cash out of the fund due to short term instability, they’ll get very worried about supporting a company, putting a lot of money in and seeing the benefits, which can take several years to play out”.

This “dependence” on liquidity also means that larger asset managers often struggle to run small-cap funds and trusts effectively, he argued.

Small-cap strategies with more assets under management generally only invest in small companies further up the market capitalisation scale, perceived to be “safer and less problematic investments”, missing out on the interesting recovery opportunities further down the market-cap spectrum.

For example, he pointed to Capita PLC, a former member of the FTSE 100 that slid to a market capitalisation of less than £200m following accounting scandals, an indebted balance sheet and too many acquisitions. Most larger asset managers “do not give it a second glance” as a result, despite greatly improved fundamentals, a more solid balance sheet and the share price rising by around 60% so far this year.

These are the kind of interesting opportunities you can take in a trust compared to a fund, he explained.

The data indicates that this approach has been successful for Rockwood Strategic, which is the top-performing fund in the IT UK Smaller Companies sector over the past decade.

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

Source: FE Analytics. Total return in Sterling.

While trusts may allow managers to take more long-term stakes, this does not mean they are always the best choice for investors, according to Abby Glennie, manager of the Aberdeen UK Smaller Companies fund (the largest IA UK Smaller Companies fund) and the Aberdeen UK Smaller Companies Growth Trust (the sixth-largest IT UK Smaller Companies Trust). This is because trusts face challenges that OEICs don’t.

First, there an issue with demand. The lack of liquidity prevents investors from wanting to get involved in investment trusts at all, particularly when it is investing in an already less liquid part of the market.

“The challenge with trusts, particularly smaller trusts, is that a lot of the market is starting to see them as irrelevant.” She argued this is demonstrated in the consolidation and purchases of investment trusts this year, with a 17% decline in the number of trusts on the market compared to 2022.

Trust also have “an additional source of underperformance”: the discount to net asset value. In recent years, as investors became more pessimistic about UK equities, the discounts on investment trusts have widened significantly across the sector, which is a further risk factor that OEICs lack.

As a result, while investment trusts can certainly be a compelling way to invest in smaller companies, it can turn off investors, she concluded.

Performance of Aberdeen Smaller Companies fund and trust over 10yrs

Source: FE Analytics. Total return in sterling

Equity funds were hit with £98m in outflows in June as geopolitical tensions in Iran unsettled the market, according to Calastone’s latest Fund Flow Index, although the conflict did not lead to panic among investors.

In June, Israel launched a series of coordinated airstrikes on over 100 Iranian military and nuclear sites, including key installations at Natanz and Fordow. Iran replied with missile and drone attacks, before the US struck Iranian nuclear enrichment facilities on 22 June.

A phased ceasefire went into effect on June 24–25 following mediation by the US and Qatar. The 12‑day confrontation subsided, immediate geopolitical tensions stabilising and markets calming down.

But June’s equity outflows were not driven by increased selling on the back of investors’ nerves, Calastone’s data suggests. Sell orders fell 2.5% to £11.4bn, but buy orders dropped 7.5% to £11.3bn – their lowest level since September 2023 – indicating a buyers’ strike rather than a rush to exit.

Net flows to equity funds

Source: Calastone Fund Flow Index – Jun 2025

Edward Glyn, head of global markets at Calastone, said: “June was characterised by caution, not fear.

“A net outflow from equity funds as an asset class is relatively rare as we have a structural bias towards adding to our savings – just one month in five over the last 10 years has ever seen investors withdraw capital.”

But he described June’s equity fund outflows as “modest”, saying a £98m withdrawal is “vanishingly small” in the light of £22.7bn of total transactions carried out over the month.

UK equity funds had the largest withdrawals, with £594m in net outflows, continuing a long-standing trend of monthly selling by UK investors. Global equity funds also recorded significant outflows at £365m, the first net selling since September 2022 and only the fifth such month on record.

European equity funds attracted £301m in net inflows, while North American equity funds saw £306m in new capital. Inflows into North American funds increased from May’s £115m but were significantly below the March and April combined total of £3.3bn.

“On the one hand investors were naturally worried by the outbreak of a war with unpredictable consequences and on the other they were reassured by global stock indices being relatively unmoved. They dropped a little at first before ending June ahead, while bond markets rallied throughout the month,” Glyn said.

“Investors weighed the uncertainty, but did not panic.”

Bond fund inflows declined to £195m from £328m in May, while money market funds saw inflows rise to £218m, up from £85m the previous month.

US president Donald Trump has delayed the implementation of reciprocal tariffs tied to his ‘Liberation Day’ trade framework until 1 August, giving trading partners additional time to make deals but adding more uncertainty to the market.

The tariffs, originally announced on 2 April, included a 10% blanket duty on all imports and a second tier of ‘reciprocal’ tariffs targeting specific countries. The second tier was suspended for 90 days, set to expire 9 July but the White House confirmed the pause has now been extended by three weeks.

Letters from the US administration were sent in recent days to countries including Japan, South Korea, Malaysia, South Africa and Kazakhstan. The letters warned that tariffs could take effect on 1 August if trade negotiations fail to deliver deals.

Some proposed rates exceed 25%, with certain sectors reportedly facing potential levies as high as 70%.

The revised timeline does not change the tariff structure or targets. Instead, it provides governments more time to negotiate exemptions. While deals have been reached with China, Vietnam and the UK, talks with European Union members and several Asian economies remain unresolved.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said: “Trump lit the fuse on tariff fears again last night, leaving investors bracing for fresh volatility.

“Wall Street was the first to react last night, with major indexes sliding over 1% as the tariff news hit the reels. After recent all-time highs for the S&P 500 and Nasdaq, the new 1 August tariff deadline and fears of skipped negotiations have markets on edge, especially with the US-China trade deal still hanging in the balance.”

European markets showed a more restrained response compared to Wall Street. The FTSE 100 edged higher and remained near record levels seen the previous month, as investors weighed whether the deadline extension would ease immediate trade pressures.

“There’s clearly a desire from the White House to get deals done, reflected in the latest extension of the tariff deadline,” Britzman said. “Investors are still digesting the latest developments, with US futures suggesting a claw back of some of yesterday’s losses.”

Market volatility, as measured by the VIX index, briefly rose following the tariff announcement but stayed well below peaks reached in April. The relatively moderate reaction suggests investors may be becoming more accustomed to shifts in US trade policy.

Defence ETFs were the most-bought thematic investment in Europe during the first half of 2025, attracting $7.87bn in net inflows across global and regional strategies, according to ARK Invest Europe.

The surge helped drive total European thematic UCITS ETF inflows to a record $8.73bn year-to-date, marking a sharp reversal from $308m in net outflows over the whole of 2024.

Global defence ETFs accounted for $4.81bn of the inflows, while European defence ETFs captured $3.05bn. ARK Invest said this shift indicates defence’s “evolution from a tactical trade to a structural portfolio allocation”.

European defence-themed investments have become popular in 2025 as rising geopolitical tensions, including Russia’s invasion of Ukraine, NATO’s new defence spending commitments and European nations boosting military budgets, have heightened demand for defence equipment and the industrial capacity to manufacture it.

Artificial intelligence remained a dominant theme, with AI ETFs bringing in $904m in net inflows. Demand was driven by advances in large language models, robotics and autonomous technologies.

Cybersecurity funds recorded $318m in net inflows, recovering from $311m in outflows during the first half of 2024. The rebound highlights growing recognition of digital security as a structural necessity for governments and businesses amid rising digital threats.

Clean energy ETFs posted $307m in outflows, as stalled policy momentum led investors to reallocate capital toward areas with more defined economic moats such as nuclear and grid infrastructure.

Reflecting this sentiment, uranium ETFs ranked fifth by inflows, taking in $253m as interest in nuclear power grew.

Healthcare innovation ETFs saw $279m in net outflows on investor caution around legacy biotech companies with uncertain drug pipelines and reimbursement risks. Investor attention is shifting toward AI-led healthcare platforms perceived to offer faster innovation and scalability.

Electric vehicle and battery technology ETFs posted $203m in outflows amid declining subsidies, softening demand, production bottlenecks and concerns over supply chains for battery raw materials.

Rahul Bhushan, global head of index in Europe at ARK Invest, said: “After a cautious 2024, it’s evident that investors are re-engaging with innovation themes that offer clearer earnings visibility and resilience in an increasingly complex macro landscape.

“We’re seeing investor conviction in megatrends with structural tailwinds, particularly defence, AI and energy security. Thematics are no longer just tactical bets, they’re core strategic exposures.”

Investment trust discounts have started to narrow, leading experts to identify those that might be poised for further re-rating if their strong performance continues.

Data from the Association of Investment Companies (AIC) shows the average investment trust is on a 14% discount to its net asset value (NAV). However, according to Nick Britton, research director at the AIC, this is beginning to change.

“Since the start of the year, discounts have narrowed in 29 AIC sectors and widened in only seven,” he said. “The average discount has narrowed 1.5 percentage points – a small move, but a welcome one.”

With this in mind, Trustnet asked fund pickers for their favourite investment trusts benefitting from narrowing discounts.

Anthony Leatham, head of investment companies research at Peel Hunt, started with the “partial rotation” out of US equities following mixed economic data and other markets have surprised on the upside.

He highlighted Aberforth Smaller Companies as an example of a trust that is already benefiting from this trend.

Its value-focused investment style and emphasis on smaller companies puts the trust on a “triple discount”: the UK is discounted compared with global markets, smaller companies are discounted compared with larger peers and the trust itself is on an 11% discount.

Over the past 12 months, Aberforth Smaller Companies has underperformed the IT UK Smaller Companies sector (5.1%) and the Deutsche Numis Smaller Companies 1000 (23.3%).

However, the trust has been a key beneficiary of “recovery in UK equities and the pick-up in M&A activity” and is outperforming the sector and benchmark this year as a result.

Aberforth Smaller Companies performance vs sector and benchmark YTD

Source: FE Analytics

“As international and domestic buyers alike begin to engage with the attractive valuations and returns on offer at the small-cap end of the UK equity market, we anticipate the layers of discount that run through Aberforth Smaller Companies’ portfolio to narrow,” Leatham said.

Meanwhile, Winterflood head of investment trust research Emma Bird favoured Fidelity Special Values.

At the end of June, its discount to NAV had narrowed down to around 2-3% from 8% at the start of the year, as investors have become more positive about UK equities, she explained. Net retail flows into the trust’s shares were consistently negative before ‘Liberation Day’ but have rallied since, according to research by Winterflood analysts.

FE fundinfo Alpha Manager Alex Wright has an “impressive stewardship” running the trust, outperforming the FTSE All Share over one, three, five and 10 years. Year-to-date performance has also been strong, with Fidelity Special Values up 17.9% and sitting in the top quartile of the IT UK All Companies sector.

Fidelity Special Values performance vs sector and benchmark YTD

Source: FE Analytics

While the 2% discount “does not offer particular value relative to history”, the board is generally committed to maintaining a single-digit discount in normal conditions, Bird said.

“We believe that the fund’s contrarian value approach, with a focus on the potential for positive change, offers an attractive proposition,” she added.

Shires Income has been “quietly building momentum this year”, according to Josef Licsauer, research analyst at Kepler Partners.

Managed by Iain Pyle, the trust favours undervalued high-yielding shares, with a slight preference for mid- and small-caps. As a result, it offers “meaningful diversification beyond traditional large-cap equity income strategies”.

For the first time in two years, Shires Income moved onto a premium towards the end of June (0.6%, as of 26 June, compared with a 13% discount at the end of the last financial year), Licsauer explained. While this has slipped in recent days, the trust still trades close to NAV.

This re-rating is particularly due to the attractive dividend yield of 5.1% which is “above average for the market” and provides a good balance of defensiveness and growth potential, the Kepler analyst said.

With UK fundamentals seemingly improving and the Bank of England entering a gradual rate-cutting cycle, which tends to benefit the more domestically exposed companies, these tailwinds are likely to continue, he explained.

“In a market where UK equities remain cheap and under-owned, we think the strategy's distinctive income-led approach appears to be resonating with investors.”

FE Analytics shows the trust’s 21.6% return is the best result in the IT UK Equity Income sector this year.

Shires Income performance vs the sector and benchmark YTD

Source: FE Analytics

Finally, Mick Gilligan, head of managed portfolio services at Kilik, said Baillie Gifford Shin Nippon has “scope for further narrowing”.   

It targets smaller Japanese companies that have disruptive business practices or appealing opportunities, such as overseas growth. This comes at a time when Japanese smaller companies are appealingly valued, with the MSCI Japan Small Cap index trading on a price-to-earnings ratio of 14.3x compared with around 30x for the S&P 500.

Shin Nippon currently has a discount of around 8% to NAV, but it generally traded on a premium between 2013 and 2021, Gilligan explained. With the trust delivering a strong performance so far this year, it is “entirely conceivable that it gets back to a premium rating” if this performance continues.

Baillie Gifford Shin Nippon performance vs the sector and benchmark YTD

Source: FE Analytics

However, Gilligan noted that the trust is a niche investment and if recent performance wanes, the discount is likely to widen. As such, it is only suitable for around a 2.5% allocation in most balanced portfolios, he concluded.

Forecasts for FTSE 100 dividends have weakened once more, suggesting investors hoping for a return to 2018’s record £85.2bn in payouts will have to wait until at least 2026.

City analysts have forecast £80.4bn in dividends from FTSE 100 members this year, down from their £83bn estimation three months ago. This represents an increase of just 2% on 2024’s payouts, putting the FTSE 100 on a forward dividend yield of 3.5% for 2025.

FTSE 100 dividend forecast

Source: AJ Bell, company accounts, Marketscreener, consensus analysts’ forecasts. Ordinary dividends only.

This is according to AJ Bell’s latest Dividend Dashboard, which aggregates forecasts for FTSE 100 companies from leading analysts on a quarterly basis to generate a dividend outlook for each company.

Russ Mould, investment director at AJ Bell, said: “Analysts seem to think that big increases will be a relative rarity in 2025, perhaps because buybacks are playing a big role in capital allocation plays – a board and chief executive are likely to draw less flak for a pause in a buyback than they are for a dividend cut.

“Investors also need to bear in mind the role of the pound, whose strength against the euro and particularly the dollar this year reduces the value in sterling terms of the dividends declared in those currencies by no fewer than 28 current members of the FTSE 100.”

That said, Natwest is forecast to increase its dividend by £532m this year, followed by Unilever (£210m increase), Admiral (£177m increase) and Fresnilo (£151m increase). On the other hand, big cuts are expected from Rio Tinto, HSBC and Shell.

Forecast dividend increases and decreases

Source: AJ Bell, company accounts, Marketscreener, consensus analysts’ forecasts. Ordinary dividends only.

Unlike 2024, no firm has yet declared a special dividend for 2025. Last year, companies including HSBC, Berkeley Group and Admiral offered such payments to the collective tune of £3.7bn.

“Any similar distributions could further top up the cash pot, as could any merger and acquisition activity,” said Mould.

“A predator is yet to circle a FTSE 100 member in 2025, but buyers of UK assets have tabled bids worth a total of £20bn already this year, after £49bn worth of successful approaches in 2024. Takeover deals can therefore add to the total return from the UK equity market overall.”

Ordinary dividends, special dividends and share buybacks

Source: AJ Bell, company accounts, Marketscreener, consensus analysts’ forecasts. *Announced in aggregate as of 20 Jun 2025

While dividend growth remains anaemic, buybacks are playing an increasingly central role in shareholder returns.

FTSE 100 firms have so far announced plans for £39bn in share buybacks in the first quarter of 2025 – equivalent to more than half of 2024’s total – which takes the total expected payout from the headline index to £119.4bn. This equates to just shy of a 5.3% cash yield on the index’s £2.3trn market capitalisation.

“That cash yield beats inflation, the 10-year gilt yield and the Bank of England base rate which, on balance, still seems to go lower before it goes higher once more,” said Mould.

Hopes for a new all-time high in pre-tax profits from the FTSE 100 are also starting to wane, with analysts’ forecasts down 7% from three months ago to £231bn. Forecasts for 2026 have also fallen by 6%.

Mould said the potential for tariffs and trade wars to move those numbers remains, while events unfolding in the Middle East will also have an inevitable impact.

“Although the manner in which BP and Shell are expected to generate one-seventh of the FTSE 100’s total earnings between them in 2025 may mean that the UK market has some kind of hedge in place, should oil spike amid gathering tension between Jerusalem and Washington on the one hand and Tehran on the other,” he noted.

The research further pointed to the fact FTSE 100 earnings are highly concentrated, with just 10 companies forecast to pay out 53% (or £42.4bn) of the forecast total for 2025.

Ultimately, the UK may offer investors a “more propitious mix of sector earnings than tech-heavy America”, said Mould, highlighting the UK premier index’s 9.6% total return so far this year, versus S&P 500’s 2.1%.

He said investors in the UK market would have access to plentiful cyclical and cheap growth and perhaps “feel less obliged to pay top dollar (in every sense) for secular growth”.

In addition, the UK’s exposure to miners and commodities could persuade some investors that the market may serve as a haven in the face of ongoing inflation or worsening geopolitical tensions. Just over a third of the FTSE 100’s expected dividends are expected to come from more defensive sectors, such as healthcare and telecoms.

“Whether this trend [in UK versus US performance] continues or not remains to be seen, and the combination of a higher index and falling profit and dividend forecasts does take some of the shine off the appeal of the UK equity market, simply by dint of mathematics,” Mould said.

A year ago the Labour Party won a historic majority and swept into power with a mandate for a new direction. The promise was to unlock growth and productivity whilst being good custodians of the nation’s moral and financial reputation.

It would be easy to go through the list of key election pledges and assess how far along the road they are to delivering on them. We could talk about policy errors and U-turns, in particular Pensioner Winter Fuel allowances. But in reality, these are symptoms and not the key theme running through the first year of this government.

And, yes it’s the same theme we have had since 2009 and one which has become acutely amplified since the Covid crisis. How does a government spend on its political priorities when, to quote Labour’s Liam Byrne in 2010, when leaving a note for his Conservative successor: “I am afraid there is no money”.

National Accounts axes as a share of GDP

Note: The October 2024 forecast as a share of GDP has been restated to account for revised nominal GDP data in the 2024 Professional Pensions Blue Book.

UK debt to GDP

Source: Office of National Statistics and Office for Budget Responsibility, March 2025. Economic and fiscal outlook.

Things were tight in 2010, as the dust settled from the 2008 global financial crisis (GFC) when debt to GDP was around 65% and interest rates were 1%. A decade later after government spending on the Covid crisis, it is now 95% (debt to GDP) with rates at 4.25%; the situation is almost unbearable.

With a natural instinct to boost government spending on health, education and welfare and a need to spend on defence, where is the money coming from?

The first Budget from chancellor Rachel Reeves did some sensible accounting by moving capital expenditure off the debt/GDP target. This has resulted in a series of long-term spending plans being developed for housing, ports, energy and infrastructure. These are hugely significant in re-wiring and re-igniting the UK economy and the focus is right:

• Driving an energy policy to create a sustainable industry with a competitive advantage and enhance investment in artificial intelligence (AI).
• De-bottleneck the roads and the railways, uncork the planning system to allow homes to be built where the jobs are for the c.70m population.
• Ensure that the UK defence industry has the investments and skills as well as the orders to thrive as defence spending rises from 2.5% to 3.5% and then 5% of GDP.

These are important initiatives: long-term investments to allow the UK to raise productivity and attract new investment and growth. But such plans are slow to mature, they do little to improve growth now but much to improve it after 2030.

But what about day-to-day spending? Fuel allowances, pensions, disability allowances, the NHS, schools, the list goes on.

And there are powerful forces telling you, you can’t do it all: Firstly, as Liz Truss found out, there is the bond market. Secondly there are the economic experts deep in government, often labelled as ‘Treasury Orthodoxy’, backing up the bond market. Lastly, there is the Monetary Policy Committee (MPC), whose only worry is inflation, which in the long term must be at 2% and their mandate is to settle the nerves of the bond market.

When the MPC was set up under Gordon Brown in 1997, it was a mistake not to give it a dual mandate, inflation and growth, as you see in the US with the Federal Reserve. In 2021 the then-chancellor, Rishi Sunak, tried to give it a secondary growth mandate but somehow it has slipped off the table. It seems to solely focus on inflation and having missed the signals on the way up in 2022, the MPC now sees inflationary dangers lurking inside almost every data point they can find and rates are very slow to fall.

As a government you need growth, to generate income, to fund promises. Growth rates since 2008 have been around half of the long-term trend and the forecasts for 2025 and 2026 show a continued global growth slowdown. The only hope is that as growth slows and even stops entirely in the next 12 months, is that inflation subsides sharply and it allows the MPC to cut rates. The cuts to rates will have to be similar to what the European Central Bank (ECB) has done, eight cuts and counting, and that gilts follow those rates lower.

If the government are tough on the current spending round – and it’s not started well with the U-turns over winter fuel, Universal Credit and Personal Independence Payments (PIP) – then it’s just possible that if the economy flatlines over the next two to four quarters, with weak oil prices and a strong sterling, these rate cuts could ride to the rescue.

This is the great contradiction that all investors remember, especially the bond market, where bad news suddenly becomes the good news. But in the wait for the rate cuts, the political pressure will rise sharply. Could they, would they hold their spending nerve? Not only does Reeves need to be the lucky chancellor, she needs to ensure that the bond market thinks she has the steel to restrict spending.

Effectively you are left thinking that the economic reality has made the promises of the last election un-obtainable. Unless you can find a new source of tax revenue, which is exactly as US president Donald Trump is trying to do via tariffs. They have tried raising taxes on school fees, pensioners, non-doms and employers, all with less success than they forecasted. Would they raise income tax or even capital gains/wealth tax? What would be the consequences? The risk today is that the government gets caught in an economic doom loop of lower growth, needing more taxes to avoid bond market jitters about government promises and spending, which again prompts lower growth.

The Labour party are caught in an economic bind that would have ensnared any party coming to power. But they did know that. The real question is can they find a way out of it? Find an economic path that gives them just enough room to effect their political choices? Or will they get lucky as weak global growth gives them an interest rate break? At present, caught in a mess they didn’t make, they are making it worse by trying to muddle through.

That will, of course lead them to lose the next election (after all only 20% of adults in the UK voted for them in 2024) and, if the polls are right, usher in Nigel Farage’s Reform Party into power. And that is why the UK’s gilts carry such a premium to their G7 neighbours.

Michael Browne is global investment strategist at Franklin Templeton Institute. The views expressed above should not be taken as investment advice.

Funds managed by Artemis, Ninety One and Schroders made the highest returns in the 12 months since Labour won the 2024 general election, Trustnet research shows.

After 14 years in opposition, the party’s 2024 manifesto promised economic stability through unlocking markets, investing in infrastructure and leading the green revolution. But unlike Tony Blair’s government in 1997, prime minister Keir Starmer has faced a sluggish economy, geopolitical uncertainty and strained US relations.

The UK’s economic growth has been far from impressive, with the fiscal situation further strained by a disappointing first Autumn Budget and a debt-ridden public purse.

According to Andy Marsh, co-manager of Artemis Income, while there have been “several false dawns” in recent years when investors thought the UK might come back into favour, there are some notable differences following a year operating under a Labour government.

“The companies that are here now are much stronger, as the weak ones have either disappeared or been taken over,” he said.

Several of the companies still standing are global in nature, Marsh pointed out, meaning they are not too dependent on the fate of the UK economy.

In particular, the UK is home to companies with the defensive qualities that investors look for during periods of uncertainty.

“Most other developed economies have similar challenges – they may not be as bad and they may be different, but I don’t think we’re alone in facing problems,” Marsh said.

But how have UK fund managers fared this year? Trustnet dug into the data to find out.

Performance of UK market over 12 months

Source: FinXL

As demonstrated by the table above, momentum proved to be the most lucrative investment factor over the past 12 months, delivering a 20.7% total return.

At the industry level, telecommunications and financials emerged as clear winners, posting robust gains of 28.9% and 28.4% respectively.

Meanwhile, value continued its resurgence, beating growth across every market cap segment. Large-cap value and small-gap value returned 12.2% and 13.3% respectively, ahead of their growth counterparts at 10.5% and 8.1%. Even in the mid-cap space, value (7%) had the edge over growth (4.9%).

While small-cap stocks as a whole returned 11.4%, slightly above a 11.2% gain for large-caps, as is shown in the ranking table, this trend didn’t translate to fund performance. Notably, none of the top 25 performing UK funds over the past year had a dedicated small-cap mandate.

Source: FE Analytics

Of the 25 best-performing UK equity funds over the past 12 months, 15 of the top funds hailed from the IA UK All Companies sector, while the remaining 10 came from the IA Equity Income peer group.

A common thread among the top-performing funds is a clear tilt toward value strategies. In contrast, growth-oriented and small-cap approaches have been notably absent from the top tier of returns during the first year of the Labour government.

Top of the table is Artemis SmartGARP UK Equity, which posted a near-30% total return during the first year of the Labour government – stretching to 144.4% over five years. The fund has almost £880m in assets and a FE fundinfo Crown Rating of five.

Managed by Philip Wolstencroft, the value-focused fund has allocated 23.2% to banks, 9.4% to financial services and 8.9% to oil and gas. Top holdings include Barclays, GSK and Shell.

It has also delivered an annualised alpha of 10.8 over the past three years, with a beta of 0.77, suggesting it has consistently outperformed the market while taking on lower volatility.

Performance of fund vs sector and benchmark over 3yrs

Source: FE Analytics

Also in the top five was Ninety One UK Special Situations, managed by Alessandro Dicorrado, with a 20.9% return over the same period.

Artemis Income, managed by Marsh and Adrian Frost, delivered a 17.8% total return between 4 July 2024 and 4 July 2025, securing a spot in the top 10 performers.

Just missing out on the top 25 in 26th place in the rankings was the first non-equity entrant – VT Redlands Property Portfolio. Targeting long-term capital growth, it returned 15.4% over 12 months and 12% over five years. Top holdings include TR Property Investment Trust and Legal & General Global Infrastructure Index.

The highest-ranking UK small-cap fund was WS Raynar UK Smaller Companies, which came in 53rd overall with a 12-month return of 11.9%.

Justin Oneukwusi, chief investment officer at St. James’s Place, said Labour’s “clear, pro-growth tone and a willingness to engage with business” has brought stability for both markets and investors.

Looking forward, he said: “Regulatory clarity from a growth-oriented government is essential as it gives businesses and consumers confidence, and encourages long-term investing. Leveraging regulation to support better investment decisions, particularly in the UK market, could unlock capital that fuels sustainable growth.

“However, markets also value fiscal credibility. Any move away from fiscal rules risks unsettling bond investors, especially at a time when global debt is rising and uncertainty is weighing on bond markets. Staying the course on fiscal discipline will help reinforce market confidence.

“Investors want predictability on regulation, on tax, and on the broader economic direction. Striking the right balance between reassurance and realism will be crucial. Recognising the role of the private sector in delivering growth will give the Government more levers to pull. In a volatile global landscape, the UK has a real opportunity to lead by creating the certainty that investors and businesses need to plan and grow.”

The second quarter of 2025 saw both a sell-off sparked by US president Donald Trump’s ‘Liberation Day’ tariffs and markets reaching record highs, but which funds made the best returns?

The Trump administration sent risk assets into freefall in April when it hit trading partners with higher reciprocal tariffs than investors were expecting, only to announce a 90-day pause. Stocks rallied in relief and have been climbing since.

Chris Beauchamp, chief market analyst at IG, said: “Equity markets, and investors themselves, have been on a remarkable journey in Q2.

“From the terrifying lows of April to the dizzying heights of the past week, the rebound has caught many by surprise. As we head into Q3, investors are still fretting about inflation and a possible recession, but these threats seem much less imposing than they did three months ago.”

Performance of Investment Association sectors in Q2 2025

Source: FE Analytics

The chart above shows the average return of each Investment Association sector over the past three months, with IA Technology & Technology Innovation in the lead after making 15.4%. This did come, however, after an average loss of 11.1% in 2025’s first quarter.

Optimism returned after April’s tariff-induced dip as investors were encouraged by a combination of strong corporate results and easing trade tensions, which helped the Nasdaq rise to record highs.

The primary market catalyst remained AI and semiconductors. Market leaders like Nvidia and Microsoft delivered eye-catching returns, with Nvidia alone adding over 40% in the second quarter, driving large-cap tech performance.

Analysts also raised price targets on key chipmakers, citing expected continued demand for AI infrastructure.

UK funds had a resilient quarter, with the FTSE 100 hitting an all-time high of 8,884 on 12 June 2025.

Sterling had a strong quarter, climbing about 6% against the US dollar - its steepest quarterly gain since October 2022 - driven by optimism around a UK-US trade deal.

Mid-cap stocks also held up, with the FTSE 250 delivering its best quarterly return in more than four years. It gained 12.5% on robust domestic demand and fresh trade optimism.

At the bottom of the table is the IA Healthcare sector, where the average fund was down 6.5%. The peer group has struggled for some time, as recently examined by Trustnet, thanks to a mix of regulatory uncertainty, pricing pressures and persistent investor rotation.

Factors such as looming patent expiries (known as ‘patent cliffs’) and ongoing debate over drug‑price reforms have weighed heavily on sentiment. US policies expanding Medicare’s negotiating power and imposing international price comparisons have intensified concerns about future revenue and margins.

Source: FE Analytics

Turning to individual funds, the best performer was WisdomTree Uranium And Nuclear Energy UCITS ETF, up just under 60%, with HANetf Sprott Uranium Miners UCITS ETF and HAN Sprott Junior Uranium Miners UCITS ETF also appearing in the top five.

Uranium ETFs performed strongly as uranium prices climbed steadily through the quarter and equities linked to uranium production rebounded from earlier lows.

This rise was fuelled by a growing supply shortfall, with global uranium production unable to meet increasing demand from operating reactors. Output cuts by major producers further tightened the market.

Blockchain-themed ETFs such as WisdomTree Blockchain UCITS ETF and Invesco CoinShares Global Blockchain UCITS ETF delivered strong performance in Q2 2025 as the crypto market rebounded and investor appetite for blockchain technology gained momentum.

The rally in Bitcoin and other major cryptocurrencies (Bitcoin rose nearly 30% during the quarter) boosted confidence and buoyed ETFs focused on blockchain infrastructure and related equities.

South Korean equities – and funds like Barings Korea Trust - posted solid gains as foreign investors returned amid easing US trade tensions.

The rally gained further support from sweeping market reforms under president Lee Jae‑myung, including improved corporate governance, higher dividend incentives and the removal of a short-selling ban. These measures reduced South Korea’s ‘Korea Discount’ and raised optimism about the country being upgraded to developed-market status by MSCI.

Other themes include a strong showing from active US growth funds, outside of dedicated tech and blockchain strategies.

Funds like MS INVF US Growth, Alger Focus Equity and First Trust US Equity Opportunities gained over 20%, reflecting that large-cap US growth rebounded strongly. This aligns with Nasdaq’s record-breaking quarter and a rotation back into high-growth names after April's pullback.

European defence is another strong market theme at present. The WisdomTree Europe Defence UCITS ETF made 23.3% in the second quarter while growing to $3bn in assets in just three months after launch.

Core European defence stocks, such as firms like Rheinmetall, Thales and Leonardo, have benefited from rising order books and government spending commitments. Market sentiment was further boosted by the German and EU-wide budgetary shifts, particularly Germany’s massive procurement spending and the EU’s Readiness 2030 plan proposing up to €800bn in collective defence investment.

Broader structural support came from policy moves including NATO’s new pledge to raise European defence spending to 5% of GDP by 2035, Germany’s easing of debt rules and the European Commission’s industrial strategy to rearm Europe.

China has long been a market of extremes, capable of dazzling highs but equally steep setbacks. The past five years have tilted firmly toward the latter, as Covid lockdowns, geopolitical tensions and an ongoing tariff war with the US sapped investor confidence.

The IA China/Greater China sector spent much of that period among the worst performers in the Investment Association universe and those who invested five years ago are now sitting on 19.7% losses on average.

But the past 12 months have brought signs of recovery, with the peer group gaining 14.9% amid renewed investor interest. Because this volatility can be hard to stomach for many investors, it is important to choose funds that offer a smoother ride or even defy the wider market’s direction.

Data from FE Analytics shows that only two China funds have managed to stay afloat with positive returns during the market’s most turbulent years, from July 2020 to today: Fidelity China Focus and FSSA Greater China Growth.

Performance of fund against index and sector over 1yr

Source: FE Analytics

Fidelity China Focus is a $2.3bn strategy managed by Jing Ning and Nitin Bajaj, who invest at least 70% of its portfolio in China- and Hong-Kong-listed companies, as well as non-Chinese companies which do most of their business in China.

It picks stocks with a bottom-up approach and a value bias.

What sets it apart – and enables it to perform independently of its sector – is its quality-value approach in a sector that RSMR analysts said is “dominated by growth”, as well as its “non-mainstream, benchmark-unaware exposure” and the “under-researched companies” it holds.

Its top-10 positions include well-known names such as technology and entertainment conglomerate Tencent (8.7%) and e-commerce retailer Alibaba (8.2%), but the rest of the portfolio is skewed towards mid-caps, including a number of plays in the consumer discretionary and financials sectors.

Fidelity China Focus suffered in the 2020 calendar year, when it ranked at the very bottom of its sector with a -3.9% return, but the losses were much more contained in 2021 and 2023 and performance was positive in 2022, adding 10% while its average peer was down 15.7%.

“The value bias of the fund can lead the fund to lag in markets where growth companies outperform,” RSMR analysts explained. “In addition, the focus on high-quality companies can mean the fund underperforms when low-quality companies are rewarded by the market.”

This isn’t the only Fidelity strategy in the list of the IA China/Greater China sector’s best performers, with Fidelity Greater China also making an appearance a few positions behind, as shown in the table below.

Source: FE Analytics

The only other fund in the black was the £407.5m FSSA Greater China Growth fund, co-managed by FE fundinfo Alpha Manager Martin Lau and Helen Chen, who invest primarily in large- and medium-sized companies based in or with significant operations in China, Hong Kong or Taiwan.

“The fund is a lower-risk option for investors seeking exposure to Chinese equities,” RSMR analysts said. “The managers’ contrarian nature makes this fund somewhat differentiated to a passive option as it tends to be underweight some of the largest stocks and sectors in the [MSCI Golden Dragon] index and often focuses on contrarian growth opportunities outside of the mega-caps.”

Tencent is the largest holding (9.6%), followed by Taiwan Semiconductors (8.1%); further down the list, Chinese consumer companies make up a quarter of the portfolio.

“The domestic China consumption story will be important to the fund over the longer term and whilst this will be cyclical at times it should grow over the medium term as China continues to catch up with more developed economies,” RSMR said.

To the analysts, this is a satellite investment option with a key differentiator in its “strong emphasis on downside protection, limiting volatility versus other China mandates”.

FSSA Greater China Growth has remained in the first quartile of performance against the peer group in all calendar years between 2021 and 2023, but slipped more recently, with 10.7% return in 2024 versus a sector average of 14.5%.

Another standout name was JPM Greater China, which in the past five calendar years, never fell to the bottom quartile of performance; a feat also achieved by three smaller strategies: Jupiter China Equity, GAM Multistock - China Evolution Equity and Polar China Stars.

No team of fund managers should ever be entirely bullish on even their highest conviction holding, according to Finn Provan, co-manager of the £6.1bn Royal London Global Equity Diversified fund.

While a high-conviction process can be praised, even talented managers can make mistakes. For Provan, the biggest example over the past year was UnitedHealth Group, a stock that “everyone in the room was bullish on” going into the year.

This meant that when the stock slid dramatically following the death of the chief executive of one of its subsidiaries in December, the team did not move to downsize it fast enough, convinced that the market would correct itself.

When UnitedHealth Group instead dropped 45%, its high allocation dragged Royal London Global Equity Diversified down. While the team would have never sold out of it entirely, not bringing it down fast enough was a mistake, she explained.

“Poor year-to-date performance is really a story of UNH,” she said.

While Provan has been on the fund as an analyst for over five years, she became co-manager when Matt Kirby and Paul Schofield officially took over Royal London Global Equity Diversified in November last year, following the departure of Peter Rutter and his team.  

Performance of Royal London Global Equity Diversified vs the sector and benchmark under new managers

Source: FE Analytics.

Below, Provan explains why the quantitative approach makes it a suitable all-weather portfolio, how the ‘benchmark relative’ approach can still provide value in a world of passives and why some of their favourite opportunities are in areas people have never heard of.

What is Royal London Global Equity Diversified’s philosophy?

It’s a fund of data-enabled stock-picking. We’re a team of sector and regional generalists equipped with data to filter the noise and find good stocks.

We want to maximise stock-specific returns and minimise factor risk through an almost 200-stock portfolio. We believe that you can make a good investment in a company at any stage of its corporate life cycle by using data.

What differentiates the fund?

Because it’s a very balanced portfolio of stocks, we want it to function as something of an all-weather portfolio, which you don’t need to chop and change depending on macro events or whether we’re in a growth or value market.

We’re a benchmark relative approach, but we’re not narrative-driven. Because of our methodology and data tools, we have clear ideas of what makes a good company based on where it is in the corporate life cycle. We want to stick to that, instead of letting ourselves get distracted by news and narratives.

Why should investors use a benchmark relative approach instead of a passive?

The way we think about it is that we don’t want to replicate the benchmark’s performance; we want to replicate its risk profile. So, for example, we want our allocation to European banks to match the risk profile of European banks within the index.

But within that, we want to let the stocks do the talking, so if there’s a company within a sector that we think is strong from a wealth creation standpoint or a valuation perspective, we want to push that to be a slight overweight to show we have conviction in those stocks. The allocation can be similar, but we want the stocks to look quite different.

The performance target is 1-2% ahead of the benchmark and we used to get even better than that, but we’ve only got a tracking error that is also only about 1-2%. We think we manage our risk similarly to the benchmark by not taking factor risk, but can still be the active stock pickers we say we are.

What you want is to be getting active style returns, because it’s a stockpicker portfolio, with passive levels of risk.

How do you find new opportunities?

We have a few considerations: we like to look where we haven’t looked in a while, what sectors have changed since the last time we looked, what areas have momentum and what the fund needs to balance its risks.

We call it turning over rocks. We have 6,000 companies we can invest in and over three years we want to have turned over all those rocks, brushed over them to make sure we’ve not missed anything.

I think for me, the perfect situation is where we look at a certain subsector and find companies that make their cash in a similar way to bigger companies, but that aren’t even in the benchmark.

For example, we own a Japanese Pachinko machine maker that’s up 350% since we bought, but it's unlocking its balance sheet and giving cash back to shareholders. We always aim to have those idiosyncratic stocks within the portfolio.

What was your best call over the past year?

The best call was probably selling Delta Airlines in early Q4 last year. It was bought in 2022 based on the assumption that it was a turnaround company that could benefit from the post-Covid period.

We made the call that the turnaround story had happened and we sold it when it was still up over 100% for us, right before it slid massively at the start of the year.

What do you do outside of fund management?

I like reading! I’m in several book clubs and I’m a massive fan of anything written by Toni Morrison, Joan Didion or Gabriel Garcia Marquez.

Other than that, I’ve gotten into running, but I suppose that’s because everyone else on the team is always running marathons.

You don’t create confident investors by limiting their choices. You create them by helping them understand what they’re doing.

The government wants more people to invest. That’s the motivation behind its apparent plan to slash how much individuals can save in cash ISAs, possibly cutting the current £20,000 allowance to as low as £5,000. The goal is to shift more capital into equities and other long-term assets, particularly in the UK.

But restricting access to a product that people understand and trust won’t solve this problem. Savers aren’t holding cash because they haven’t been nudged hard enough. They’re holding it because cash is simple, stable and, crucially, they understand it. Strip away that option and you create uncertainty, rather than unlock investment.

For pretty much every saver, cash isn’t a speculative asset but peace of mind. It’s what they turn to when the boiler breaks, when they lose work or when they’re saving for something real and tangible: a deposit, a car, a wedding. It’s a buffer against the unknown.

Cash doesn’t demand technical knowledge. It doesn’t fluctuate. And unlike investing, it doesn’t punish you for checking your balance. That clarity and control matters, especially to people who’ve had to fight for financial stability.

Yes, returns on cash are limited. But in today’s market, with interest rates around 5%, many see it as good value for low risk. That’s a rational, informed trade-off.

That means moving from saving to investing isn’t simply about shifting accounts. It’s about entering a system that’s inherently more complex.

Most people aren’t taught how markets work. They don’t learn about risk-adjusted returns or how to weigh volatility against time. They just know that investments can lose money and that they don’t want to make a mistake they can’t afford.

The choice paralysis is real. There are thousands of funds, platforms and portfolios. Many sound similar. Some are low-cost and diversified; others are high-fee, opaque and ill-suited to beginners. But the difference between a good choice and a poor one often only becomes clear years later.

We’ve built a system that expects people to act like investors without equipping them to think like investors. That gap – between access and understanding – is where risk becomes harm.

The vast majority of retail savers will never pay for financial advice. The cost doesn’t make sense for small portfolios. DIY platforms fill part of the space, but most can’t offer tailored recommendations without breaching regulation. So users get filters, charts and disclaimers, but no clear direction.

This leaves people trying to make investment decisions alone, without context and without confidence. They’re right to be hesitant.

When ISA rules were changed in 2014 to allow more investment flexibility, uptake didn’t surge. Most savers just kept doing what they were doing.

The impulse behind the cash ISA cap is understandable. UK companies need more domestic capital. Long-term investing can build wealth. But capital isn’t passive: it follows trust and it follows understanding.

Remove the familiar structure of cash ISAs and people won’t automatically move into markets. Some may just leave their money outside the ISA wrapper. Others might disengage entirely, afraid of making the wrong call.

But if someone is nudged into investing before they’re ready and ends up taking a loss, that lesson won’t teach them to be smarter – it’ll teach them not to come back.

If the government wants more people to invest, it needs to focus less on restricting behaviour and more on building capability. That means treating financial education as a long-term priority, not a footnote.

We need a public that understands the difference between cash and risk assets, knows how to assess basic investment options and feels confident about long-term strategy. Until that foundation is in place, changing the rules around ISAs won’t move behaviour in any meaningful or lasting way.

Because investing isn’t intuitive. It’s not the same as saving and it’s not something people fall into just because a tax rule changes.

The goal of widening participation in capital markets is a good one but – while there’s merit in nudge theory – savers deserve better than a push. They need the tools to choose for themselves and the confidence to know what they’re choosing.

Pushing people toward risk without equipping them for it is potentially ineffective and harmful. Policymakers should take note: trust in financial markets is hard-won and easily lost. If the aim is to build a nation of investors, it must begin with education, not coercion.

Gary Jackson is head of editorial at FE fundinfo. The views expressed above should not be taken as investment advice.

UK equity funds targeting smaller companies, dividend payers and value stocks are among those that fund pickers expect to outperform if the UK market continues to perform strongly.

After years of underperformance, the domestic market is staging a comeback.

As investors have struggled to get to grips with trade volatility stemming from the White House, formerly top-performing markets such as the S&P 500 have struggled. Meanwhile, the UK has rallied as investors have pivoted out of the US, with the FTSE All Share surging by 9.4% this year, one of the better developed market results.

Performance of indices year to date

Source: FE Analytics. Total return in sterling.

For some managers, this could signal the start of a genuine long-term rally for the UK market. Below, experts identify funds that have already benefited from the recent rally and might be poised to continue outperforming.

Jack Driscoll, fund analyst at FE Investments, highlighted George Ensor’s RGI UK Listed Small Companies fund, saying: “The UK market rebound has finally rippled down to smaller companies.”

This has benefitted this strategy, which invests 80% of its capital in the smallest 10% of the market. As a result, Ensor’s fund is up by 6.5% so far this year, beating the average peer in the IA UK Smaller Companies sector.

Performance of RGI UK Listed Small Companies vs the sector and benchmark year to date

Source: FE Analytics. Total return in sterling.

Driscoll added that RGI UK Listed Small Companies has a large weighting in cyclicals, which “gives direct exposure to the domestic economy”. This has been a tailwind this year as the Bank of England has entered a gradual rate-cutting cycle, benefitting the fund’s 14% allocation towards financials.

Its 70-stock book is another advantage because it “leaves headroom to top-up outperformers without adding concentration risk”. This allows Ensor to run his winners if optimism towards the UK persists.

However, because it is targeting the smallest companies at an already volatile market capitalisation, it is most suitable as a satellite holding for investors. This added volatility means the fund would be most suited for investors with a higher level of risk appetite and at least a five-year time horizon, Driscoll explained.

For an alternative that could suit both growth and income investors, Paul Angell, head of investment research at AJ Bell, identified Henry Dixon’s Man Income fund.

The fund targets UK companies across the market cap spectrum that are paying a yield in line with or better than the market average, he explained.

“Their investment process centres on identifying two types of stocks: those trading below their replacement cost (i.e. what it would cost today to replace a company's assets and operations) that are also cash-generative; and those where the market appears to be undervaluing profit streams,” Angell said.

There are plenty of undervalued and unloved companies in the UK, giving the fund a broad opportunity set, he noted.

This has allowed Man Income to benefit from the recent rally, narrowly beating the FTSE All Share, as seen below. Despite strong returns, it “remains cheaper than the market on a circa 10x price-to-earnings ratio”.

Performance of Man Income vs the sector and benchmark year to date

Source: FE Analytics. Total return in sterling

Long-term returns are also strong, with the fund posting top-quartile results in the IA UK Equity Income sector over the past three-, five- and 10-year periods.

In terms of risk tolerance, Angell suggested that a low allocation would suit more cautious investors.

Finally, Forvis Mazars’ associate investment governance director and model portfolio manager James Rowlinson pointed to Jupiter UK Dynamic Equity.

While he accepted there was initial uncertainty about the strategy after manager Ben Whitmore departed last year, new manager Alex Savvides has “set the fund up for future success”.

Jupiter UK Dynamic Equity's value tilt has been a benefit this year as investors have pivoted away from growth towards more defensive and cautious stocks. Improving sentiment towards the UK and a rotation away from the US has naturally boosted the valuation of bargain stocks.

Additionally, Savvides has made beneficial changes to the overall approach. Instead of just taking good value stocks, he has emphasised overlooked names with improving outlooks, which have significant rerating potential.

Already, this change in strategy is paying off, with names such as Burberry and ConvaTec surging this year on the back of improved sentiment. As a result, it has made a top-quartile return in the IA UK All Companies sector, beating the UK market by around four percentage points.  

Performance of Jupiter UK Dynamic Equity vs the sector and benchmark year to date

Source: FE Analytics. Total return in sterling.

While the fund can in theory go anywhere on the UK market, it has a slight tilt towards mid-caps and a beta of more than one. As a result, investors should treat it as a source of diversification in a balanced portfolio, by pairing it with another fund that has a complementary style, Rowlinson concluded.