The measures, announced by US President Donald Trump over the weekend, see a 25% tax placed on goods from Canada and Mexico, and 10% on imports from China.

In response, Canada has already announced a tariff on US goods while Mexico and China are also expected to retaliate.

At 11:45am, the FTSE 100 had fallen 1.2% since the start of the day’s trading, following similar falls overnight in Asian markets.

See also: GAM Investments hires Janus Henderson management trio

Richard Flax, CIO at Moneyfarm, says investors are increasingly concerned that these moves could trigger a cycle of retaliatory tariffs, escalating into a full-scale trade war.

“With the new administration taking a more aggressive stance than some had anticipated, markets are now reassessing his previous rhetoric to anticipate the administration’s next steps,” he says.

“The president has long held the view that import tariffs could help fund the federal budget as an alternative to raising taxes. Now, emboldened in his second term, his administration appears more determined to pursue this strategy, having taken a more measured approach during his first term.

“The initial market rally following Trump’s re-election was driven by optimism over deregulation, with investors largely downplaying the risks of protectionist policies. However, the rapid implementation of tariffs – including those targeting key allies – has forced markets to consider the economic consequences.”

He added attention will now shift to Europe, following Trump’s comments that tariffs on the EU are “definitely happening”.

“For American consumers, these tariffs are expected to be inflationary, exacerbating the financial strain from the high inflation seen between 2022 and 2023. These moves also raise questions about the Federal Reserve’s ability to cut interest rates in the near term. Given the heightened uncertainty, the Fed is likely to hold rates steady, opting to assess market conditions before considering any adjustments.”

PA event: PA Live: A World Of Higher Inflation 2025

According to AJ Bell investment director Russ Mould, markets had assumed that Trump would talk tough on tariffs before backing off when he got a deal. Therefore, his plan to act first and then talk has come as a “nasty surprise” to share prices around the world.

“Trump’s launch of tariffs in 2018 did raise revenues for America but US corporate profits took a hit that year and America’s S&P 500 index fell by a fifth, so markets have understandably taken fright this time around.

“Weirdly, stockmarkets have begun Trump’s second term in boisterous form, in marked contrast to 2016’s election result when they approached the Republican candidate’s win with caution. Ultimately, the S&P 500 gained 56% during Trump’s first term, but that came with a big wobble in 2018, when the index lost 5% overall and endured a mini bear market in the autumn, as threats of tariffs on China became reality.

“America’s tax take did benefit, as customs duties doubled in short order. The tattered state of US federal finances, where the debt is far higher now and the interest bill is surging, means this offers some good news, from an American perspective.”

Moving forward, the strategy will be known as the Baillie Gifford Monthly Income fund.

However, the fund’s investment process will remain unchanged. The strategy aims to deliver a natural monthly income alongside capital returns, which look to grow in line with UK inflation over the long term.

See also: GAM Investments hires Janus Henderson management trio

The strategy will continue to be managed by Steven Hay, Lesley Dunn and Nicoleta Dumitru.

James Dow, who co-manages the firm’s Responsible Global Equity Income fund and the Scottish American Investment Company, has been replaced by Jon Stewart on the fund’s portfolio construction group.

Stewart will focus on property investing, while Dow will remain linked to the strategy as its equity allocation uses the Responsible Global Equity Income model.

See also: PA Live A World Of Higher Inflation 2025

James Budden, head of global marketing at Baillie Gifford, said: “Ultimately, we believe the term ‘Monthly Income’ is more appropriate as it describes how the fund seeks to provide a resilient income stream and grow capital in real terms.

“No changes to the philosophy and process have been made to the Baillie Gifford Monthly Income Fund and we are confident that the name change gives investors greater clarity around their investment choice. We think this fund provides an excellent income solution for investors many of whom might be a long time retired.”

While the cut was anticipated, the ECB has sought to address weak eurozone growth with its fifth cut since June of last year.

However, David Zahn, head of European fixed income at Franklin Templeton, expects rates to fall further to 1.5% by the end of 2025.

“Analysts forecast further cuts, potentially bringing the rate to 2% by the end of 2025. The eurozone’s stagnant economy, with a Q4 2024 GDP growth of 0.0%, suggests a need for additional monetary easing. While inflation remains a concern, the economic slowdown is likely to take precedence.

“The upcoming March forecast will be pivotal in confirming the trajectory of increased ECB rate cuts throughout 2025. A more accommodative ECB should be supportive of European bonds, specifically the short end of the market.”

PA event: A World Of Higher Inflation 2025

Central banks diverge

The latest ECB cut follows the Fed’s decision to keep rates at 4.25-4.5% yesterday evening (29 January).

“The ECB’s decision to cut rates by 25bps, while the Fed appears set to hold rates steady for longer, highlights a growing divergence in monetary policy between the regions,” said Morgane Delledonne, head of investment strategy at Global X ETFs.

“While eurozone GDP remains stagnant, economic conditions are deteriorating further in France and Germany.

“Despite acknowledging that inflation has not yet returned to target, the ECB seems more focused on supporting growth, prioritising economic stability over potential inflationary risks.

“In contrast, the US and UK continue to balance persistent inflation concerns with economic resilience, suggesting a different policy outlook. The muted market reaction implies that this divergence is already fully priced in.”

See also: Is it time to re-consider thriving China funds amid their rally?

Neil Birrell, CIO of Premier Miton Investors and lead fund manager on the Premier Miton Diversified fund range, said the diverging path of interest rates will be a key consideration for the ECB at future meetings.

“The economy continues to show signs of fragility, evidenced by the Q4 GDP data, with the key French and German economies shrinking at the end of last year, although the outlook for inflation looks to be as positive as could be hoped.

“One of the key considerations for the ECB will be just how far they can diverge from the Fed through the rest of the year. While they will say they will act independently, as they have to, they will have a keen eye on the euro given it is so close to parity with the dollar.”

However, these funds came bounding back in 2024, with IA China becoming the fifth-best performing Investment Association sector of the year as returns leapt 13.8%.

This strong performance contrasted with prior years, with eleven funds making total returns upwards of 20%, and only two portfolios – Guinness China A Share and Fidelity China – reporting losses.

See also: Is China at a turning point, or will it disappoint yet again?

It begs the question: should investors be re-considering an allocation to China funds within their portfolios? Those with a sturdy risk appetite should certainly be eyeing up the sector, according to Chelsea Financial Services managing director Darius McDermott, who said China has some of the highest return potential on the market this year.

Bold stimulus plans from the People’s Bank of China (PBoC) are what propelled Chinese equities in 2024, and further measures to revive China’s economy and stabilise its property market are expected in the months ahead. These new stimulus announcements could again push China funds to new heights, according to McDermott.

See also: Chinese markets soar following announcement of ‘aggressive’ stimulus package

Yet the readjustment last year was sharp and fast, making it easy to miss. The IA China sector shot up 20.7% in the week following the PBoC’s announcement in September before levelling out, where it has stayed ever since. Investors who want to bank on another round of stimulus plans stimulating the market should act fast, or risk being left behind, McDermott warned.

“It shot up in a very short period of time, so if you’re waiting for another stimulus announcement, be ready to pull the trigger, because it won’t wait for you,” he added.

Tariffs could extinguish hopes for growth

There is one overbearing factor that could turn China’s outlook from hopeful to grim – tariffs. Trump’s proposed 60% tariff on Chinese imports to the US could offset the positive sentiment injected by upcoming stimulus announcements and plunge China funds’ returns back into the red, according to McDermott.

See also: How will Trump’s tariffs impact markets?

Until further details are shared on the extent of tariffs and stimulus plans, the potential outcomes for China funds remains stark. Investors stand to make some high returns from the Chinese market in 2025, but could equally lose just as much, according to McDermott.

“You can’t have a low risk way of investing in China. If you’re investing in China, you are seeking superior returns, and for that you must expect superior risk,” he added.

“If Chinese equities went up 40% this year I wouldn’t be surprised – but equally if they went down 40% I also wouldn’t be surprised. When you’ve got such a wide spread of potential outcomes, it really shows the inherent volatility in that market.

See also: China’s AI breakthrough causes US tech stock tumble

“There is more stimulus to come after the tariff position is understood, and that could be a catalyst as it was last year for a sharp upward tick. But the lingering threat of course is China’s interest in Taiwan – that question mark refuses to go away.

“And with the Communist Party of China becoming more authoritarian under Xi Jinping, all those question marks still have people feeling uncomfortable about investing in the region.”

Despite investors’ hesitancy to reallocate to China, Ben Yearsley, director of Shore Financial Planning, said China funds are “cheap and fascinating”. Share prices in the region have dropped sizably amid the downturn of the past few years, presenting an appealing entry point for those with the right risk tolerance.

See also: A World Of Higher Inflation 2025

Yearsley is continuing to buy funds such as Fidelity China Special Situations and Matthews China Discovery, which are up 18.1% and 16.6% respectively over the past year.

The former is trading at a 12.7% discount to its net asset value (NAV), which could provide investors with a slight buffer should returns tumble.

The decision to hold, which was largely expected by the broader market, comes as US inflation remains 90 basis points above target at 2.9%, alongside the US economy remaining at close to full employment.

Daniela Sabin Hathorn, senior market analyst at Capital.com, said the FOMC’s accompanying statement “once again defended a hawkish stance” with the absence of “any reference about inflation making progress towards the 2% target”.

“It also notes that economic activity has continued to expand at a solid pace while the unemployment rate has stabilised at low levels,” she explained. “While the central bank notes it is attentive to risks to both sides of its dual mandate, the vote to leave rates unchanged was unanimous, suggesting the current pause in rates will likely be extended further.”

See also: ‘The Chancellor has a large task ahead’: UK GDP rises by 0.1%

While markets anticipated that the Fed would hold firm on rates, the decision comes one week after US president Donald Trump demanded an interest rate cut at the World Economic Forum.

Richard Flax, chief investment officer at European digital wealth manager Moneyfarm, said the move will “no doubt frustrate Trump” as the central bank “clearly adopt[s] a wait-and-see approach”.

“Policymakers are likely assessing the impact of the president’s policies on inflation and the broader economy, particularly as his stances on immigration and tariffs continue to unfold.”             

Kambiz Kazemi, chief investment officer at Validus Risk Management, described the polarisation between Trump and the Fed’s views on rates as “the first round of monetary policy stand-off” between the two parties. “In fact, the Fed’s latest statement struck a slightly hawkish tone by suggesting unemployment may have bottomed out, indicating that it views the labour market as robust.

“This position will likely intensify Trump’s criticism over the coming months, and given his inclination to challenge the status quo, we may even see proposals to amend the Federal Reserve Act or alter the Fed’s mandate.”

US bond market ‘likely to stay under pressure’

Reacting to the news, the S&P 500 index initially fell by 0.7% yesterday, but quickly recovered some ground throughout the course of the day. Meanwhile, the US dollar and bond yields edged higher.

Hathorn said: “In the midst of the current earnings season and following the shock seen earlier this week after DeepSeek entered market consciousness, the impact of the FOMC meeting was expected to be limited.

“There may be some added focus on Powell’s commentary in the upcoming press conference, but he is unlikely to give away any new information about the central bank’s forecasts. Market pricing continues to show around 45 basis points of cuts priced in for 2025 after the softer core CPI reading in December increased the odds.”

Daniele Antonucci, chief investment officer at Quintet Private Bank, said the US central bank “isn’t likely to cut rates again in the near term” given the strength of US economic growth.

He said: “As there’s still significant uncertainty around the timing of any Fed move, the US bond market is likely to stay under pressure, especially as any fiscal stimulus might add to inflationary concerns.

“Because of this, and also taking into account that there’s a risk that the extra supply to US bonds might be tough to digest, we’re underweight US Treasuries and prefer short-dated bonds in Europe where the European Central Bank is likely to cut more rapidly, given economic weakness.”

Elsewhere, he remains “slightly overweight US equities as he thinks “growth prospects and deregulation will be supportive”.

“At the same time, given demanding valuations in tech and market concentration, we diversified our exposure into more attractively valued sectors such as industrials and financials that might benefit from US fiscal stimulus.”

Last year, corporate bonds achieved stable returns and rocketed in popularity, following expectations of falling interest rates across most developed economies. As such, the asset class is entering 2025 at tighter spreads than markets have seen for some time, but also with more attractive yields as interest rates reached highs not seen in several years.

The performance of government bonds has been more volatile, according to industry commentators, and looks set to remain so. The election of Donald Trump as US president, combined with weaker economies across western Europe, means that while interest rate cuts are virtually inevitable, the timing and scale of them is relatively unknown.

Iain Buckle, head of UK fixed income at Aegon Asset Management, says: “We expect bond markets to remain volatile in 2025. The market currently expects a further 75 basis points of cuts from the US Federal Reserve over the next 12 months. The broader US economy still seems robust, however, and those 75 basis points of expected cuts could look optimistic if the labour market remains resilient.

“The political backdrop in the US will also drive volatility, given the market assumes a Trump presidency will lead to looser fiscal policy and higher inflation. We will learn more as he takes office, and the reality may not be what the market has implied. But it’s likely the style of his presidency will only add to the uncertainty and volatility in markets.”

David Knee, deputy CIO of fixed income at M&G Investments, agrees that Trump’s election will increase volatility across markets, as investors anticipate how his second administration pans out.

“The first Trump presidency showed what Trump said he would do and what he actually did was very different,” he reasons. “Bond markets will be watching for key policies such as tariffs, tax and immigration, which could potentially reignite inflation and limit the ability of the Fed to act, as well as add to already growing deficits.”

Over in Europe, Buckle says the outlook is “slightly more certain”. “Core European economies have been struggling for some time, negatively impacted by a weak Chinese consumer and growing competition from within China itself.

“We expect the European Central Bank (ECB) to continue to cut rates, with 125 basis points of cuts expected by the end of the year. It would take a further deterioration in the outlook for the market to price in further cuts, but that is certainly a possibility as we learn more about US tariffs early in 2025.”

To read more on the outlook for government bonds, credit, equities, emerging markets consolidation and Consumer Duty, visit the January edition of Portfolio Adviser Magazine

In the event, there was no explosion. Instead, there was a clean-up effort that lasted years and the undamaged reactor did not reopen until 1985. However, the public’s confidence in the safety of nuclear power had eroded and Three Mile Island was eventually closed in 2019.

Grow your own

Despite the energy source remaining shrouded in speculation, in September 2024, Constellation Energy announced that Three Mile Island would be reopening, with Microsoft as the sole purchaser of its energy on a 20-year contract. The motivation? Powering Microsoft’s data centres for the growing presence of AI.

Microsoft is far from the only company to anticipate the burgeoning need for energy in coming years and to take matters into its own hands. However, as investments in AI have shot up in recent years, investments in energy, and specifically renewable energy, have tanked.

See also: Aegon: Data centres are the new dividend drivers

By 2030, the US Electric Power Institute estimates the energy demands of data centres could account for more than 9% of all US energy consumption. Currently, this sits at 4%. Jim Wright, fund manager of the Premier Miton Global Listed Infrastructure fund, says the phenomenon could lead to “a land grab” for energy supply and generation, exemplified by the Microsoft deal.

“The requirement for additional electricity will stretch the system capacity, particularly at seasonal and daily demand peaks. The inevitable solution is more investment in generation capacity, which will include renewables, batteries, gas-fired generation and nuclear power,” Wright explains.

“The costs, lead times and technological and regulatory challenges make new nuclear, either in the form of Small Modular Reactors or large power plants, a longer-term solution. There is considerable momentum, as shown by Meta’s recent request for developers to provide between one and four gigawatts of new nuclear capacity in the US to power its AI data centres.

“The growth in electricity generation capacity will require significant capital expenditure and changes the long-held perception of electricity utilities, which may now be classed as ‘growth stocks’ for the next decade.”

Read the rest of this article in the January edition of Portfolio Adviser Magazine

The Alger Focus Equity fund posted a return over the year of 56.3%, while another of its strategies, the $564m Alger American Asset Growth fund, was up 52.39%.

While surging share prices in Nvidia and other US tech stocks on the back of AI have been among the largest contributors to performance over the last year, the Alger American Asset Growth fund is one of the few actively-managed funds to beat the S&P 500 over a 10-year period.

See also: Yearsley: Financials ‘surprise winner’ of 2024

Speaking to Portfolio Adviser, Alger CEO and CIO Dan Chung says that the firm’s long-term performance is down to a lot more than just holding Nvidia.

Chung is a named manager alongside Dr Ankur Crawford and Patrick Kelly on Alger American Asset Growth, while Crawford and Kelly also run the Alger Focus Equity fund.

“Over a long-term period, its not about a single stock. It’s hundreds of decisions every year, and sometimes the decision is not to sell,” Chung says.

“We were early in Nvidia, buying in 2022. After 2023 saw a spectacular rise in the stock, a lot of people were saying that it must be time to sell, without carefully understanding the fundamentals of the business and how early on we are in the AI revolution. Our biggest and best decision was not to sell any of our Nvidia stock at that time, and it remains a top holding.

“Over the longer term, the success of the strategy has been a relentless focus on the depth and the quality of our team. 60 investment professionals for a firm of our size is actually quite a lot.

“We have a concentration of analysts that is probably 2-3 times more than a lot of our competitors.”

See also: Artemis merges European funds

The firm’s investment approach seeks to benefit from what Chung labels ‘positive dynamic change’. Reviewing the performance of the Alger American Asset Growth strategy over the last 10 years, in which it has posted a 430.8% return (as of 7 January), he says it has been a period of immense change.

“That period started with coming out of the great financial crisis, before entering into the most radical changes in American politics in decades.

“Our relentless focus on our philosophy of positive dynamic change – it means that culturally, as an investment firm, we’re very focused on embracing change. Don’t be afraid of disruption, innovation and volatility. Instead, we look at it as an opportunity to look for the positives that come out of these changes.

“The world is changing faster. There is more innovation and more disruption, which means winners and losers are created faster than they were in the past.

“It’s a highly competitive game. It requires people, but it also requires that right philosophy and mindset.”

European growth

The New York-based boutique is a growth equity specialist, and though it is better known back at home, the firm is looking to expand its offerings in Europe.

“We only have about 5% of our clients internationally — we have a two-person office here in London and a one-person office in Singapore, and we’re trying to grow in both regions.”

“We have been interested in talking with European asset managers in a similar situation, whether we can partner to help them grow in the US, and help Alger grow over here.

“There are some very obvious advantages for a European asset manager to consider partnering with a firm like Alger. We can offer significant US distribution. I’ve met many firms here that are actually quite large and don’t really have any US distribution, and we don’t have significant European distribution. The opportunity is pretty large.”

Industry M&A

The firm, founded in 1964 by Fred Alger, recently celebrated its 60th anniversary.

Industry M&A has seen many boutique firms in both the US and Europe swallowed up by larger asset managers.

However, Chung says that this trend has led to the unique selling points of larger asset managers becoming distorted, which can be exploited by existing boutiques.

“We’ve been taking advantage of the industry structure right now. In traditional asset management, you have a few global giants, and then you have a lot of very big companies just outside of the top 10.

“A lot of them have been created out of multiple mergers. The challenge there is that they don’t have the distribution scale of the largest names, and because they’ve been created out of mergers, a lot of them are like supermarkets. They offer everything, but they’ve lost a little bit of what they are best at.

“They all originally had something that they were really good at, whether it was bonds, equities or real estate, but now that they’ve become these large ‘supermarkets’ – they’re trying to compete with the Costco’s and the Tesco’s.

“They have a lot of challenges because it’s hard for them to grow as they’re large already. Their cultures are just within the team of the investing, and they’re not necessarily particularly known to be particularly at any one thing.”

Now, another turn in truths may be occurring for the asset class, as the risk factors of corporate and government bonds begin to shift. According to Shaniel Ramjee (pictured), co-head of multi asset at Pictet Asset Management, bonds issued by corporates are currently “paradoxically safer”.

“A lot of corporates have managed their balance sheets very well. They’re not as leveraged as they have been in the past, and therefore the spreads that they trade out over and above governments are low, but they might stay low for longer periods of time because of the nature of a much more diversified opportunity set,” Ramjee said.

“These corporates aren’t as indebted as the governments, and by and large, we see less and less corporate bonds being issued versus government bonds being issued every week. The supply and demand of these two asset classes is different. So I think paradoxically, we’re in a period where government bonds are riskier than usual, and actually corporate bonds can be less risky than usual. And I think that’s an interesting difference today than we might have seen in years gone by.”

While the issuance of some corporate bonds has caused a bidding war among investors, government bonds from typically desired countries such as the US and UK are all too available for investors as they attempt to stimulate their economies.

Other countries with typically stable markets, like France, have been rocked by political uncertainty. French 10-year government bond yields currently sit above 3.4%, almost a percentage point above the 2.6% levels of last January. French yields now sit in line with the government bond yields in Greece.

See also: What does the gilt yield spike mean for UK bond prospects?

“Ultimately, these governments have borrowed a lot of money. They’re highly leveraged, and unfortunately, like we see in the UK, the propensity for these governments to want to come and borrow is very high. So the risk is that the credit worthiness of those countries are deteriorating, and no one wants to really think about reducing spending,” Ramjee said.

As of October 2024, the estimated UK government bond issuance for the 2024/25 fiscal year was £294bn following an expansion by Rachel Reeves during the Autumn Budget.

When markets opened on the day of the budget, the yield of a UK 10-year gilt sat at 4.27. As of market close on 6 January, the yield is 4.61. Year on year, yield has increased by 23%. In the last week, 30-year gilt yields hit their highest level in near three decades.

To Ramjee, this could be the beginning of a larger problem if the economy is not able to grow under the new fiscal policies.

“Particularly within the UK, we’re at a really high tax burden. But on top of that, what’s happening is that if you don’t grow the economy, the risk is that the government has to come back for more taxes in the coming years. And I think that’s the other element that markets are worried about, especially in UK gilts, is that the tax rises have not finished,” Ramjee said.

“That’s why it’s so important to have growth policies along with any other tax rises, because if you don’t have them, then the market will get more concerned that you’re not doing anything to actually to grow the economy. That’s what’s been weighing on the gilt markets to date.”

See also: Will bond yields stay higher for longer?

As the asset class shifts, Ramjee said its use in portfolio’s becomes less clear: government bonds in particular were traditionally seen not just as a diversifier against equities, but a way to manage levels of risk. Now, Ramjee said it can not be relied on as heavily for either of those reasons.

“Government bonds provided a good stabilizer in a portfolio. They provided income, but they also provided a diversifying effect. When equities went down, bonds went up, and that helped the overall balance of a portfolio.

“What we see now as those debt levels have risen, and as the risk in those government bonds has risen is that the correlations are no longer as good for multi-asset portfolios, so you can’t rely on them as much as you could before to give you that diversification. And I think that is worrying from a multi asset standpoint, that you have to rely on different types of assets to diversify you.”

Managers Ankur Crawford and Patrick Kelly built a concentrated portfolio of just 48 stocks, with much of its allocations focused on five tech companies. Tech behemoths such as Amazon, Microsoft, Nvidia, Meta, and Applovin account for the top 39.1% of the fund and drove most of its performance in 2024, according to its latest annual report.

These thriving tech giants were a source of high returns for many investors in 2024, especially Nvidia. Its soaring share price in recent years has made it a market darling, but Nvidia’s 179.2% increase in 2024 appeared mild compared to Alger Focus Equity’s fifth-largest holding, Applovin.

The mobile marketing technology company’s share price rocketed 751% last year, boosting the fund’s total return well ahead of other IA North America funds.

Alger Focus Equity has been a stand-out winner over the long-term too, boasting to be the fifth best-performing fund in its peer group since launching in 2019. Its total return of 193.7% over the period places it 80.3 percentage points ahead of the sector’s average return of 113.4%.

Other IA North America funds with an overweight in tech – and high allocations to Applovin – were also among the best performing portfolios of 2024. The Alger American Asset Growth and Lord Abbett Innovation Growth funds also delivered supercharged returns last year, climbing 50.6% and 45.9% respectively.

However, while US equity funds may have taken the top spots, it was portfolios in the IA Financials and Financial Innovation sector that delivered the highest returns on average. Funds in this group increased investors’ returns by 24.3% in 2024, whereas IA North America grew them by a slightly milder 22%.

The Janus Henderson Global Financials fund was the best performer in the sector, soaring 34.2% throughout the year, with Xtrackers’ MSCI USA Financials and MSCI World Financials ETFs following closely behind with returns of 22.6% and 29.1% respectively.

The sector benefited from high interest rates, reasonable economic growth and moderating inflation in 2024, as well as a surge in share prices following the re-election of Donald Trump in the US, who pledged to deregulate the sector.

Best performing sectors of 2024

Source: FE fundinfo

Nevertheless, investors did not need to look solely at financial funds or those exposed to tech-heavy US equities for the highest returns. The second-best performing portfolio of the year was dedicated to a more niche corner of the market – European emerging markets.

The JPM Emerging Europe Equity fund soared 53.9% throughout 2024 with a portfolio consisting mostly of Russian equities, which accounted for 67.7% of the fund’s assets.

Fairview Investing director Ben Yearsley speculated that this fund may have been another beneficiary of Trump’s victory, as the president-elect frequently vowed to force a resolution between Russia and Ukraine during his election campaign.

The best performing funds of 2024

Source: FE fundinfo

Another specialist fund to top the charts was the WisdomTree Blockchain ETF, which generated some of the highest returns in the Investment Association universe last year (up 44.5%) by investing in cryptocurrency technologies.

While prone to sharp turns in performance, crypto markets ended 2024 on a high as one of its leading currencies, Bitcoin, surpassed $100,000 for the first time.

This rally was again driven by Trump’s election victory, with the incoming president expected to take a more laxed approach to crypto regulation than the Biden administration. He has already appointed crypto advocates such as Elon Musk, Paul Atkins, and Howard Lutnick to influential positions within his new administration, who could influence Trump’s policy direction.

Additionally, the external fund manager will change. The £5.2bn fund had been run by Kirsteen Morrison and David Winborne at Impax Asset Management, but Schroders will take over as the fund’s sole manager going forward. The fund will also invest in Schroders’ Global Sustainable Growth and Global Value Equity investment strategies in order to increase the range of companies the fund can invest in.

According to St. James’s Place, the changes – which will come into effect from 24 February 2025 – will improve diversification and introduce a more balanced blend of investment styles, while maintaining the focus on sustainability, which is required to meet the FCA’s new higher threshold for sustainable investments.

See also: “EY: Investors display ‘worrying level of apathy’ to ESG“

Ongoing charges will be reduced by 0.01% as a result of these changes.

Justin Onuekwusi (pictured), chief investment officer at St. James’s Place, said: “The bar to be a labelled fund is very high and will help clients to better understand how their money is being invested in companies that aim to deliver a positive outcome for people and the planet.

“Schroders is a well-regarded expert of sustainable investing, with a diversified approach. They have depth of experience across different equity investment strategies, which can provide a more balanced blend of investment styles for the fund.

“We’d like to thank the team at Impax for their expertise, partnership and their key role in the success of the fund to date. We continue to see Impax as a leader in investing in the transition to a more sustainable economy and a key partner for us in the future.”

Alex Tedder, co-head of equities at Schroders, added: “This investment allocation by SJP underlines the quality of our active investment process and commitment to delivering sustainable outcomes for our investors.

“Clients, investors and the industry are increasingly focused on bespoke investment solutions that can deliver strong risk-adjusted returns together with a comprehensive commitment to sustainability. Our broad-based capability and commitment to active management puts us in a strong position to meet client objectives in a rapidly transforming investment environment.”

This article was originally published by our sister title, PA Future

The latest Man versus Machine report from AJ Bell showed that only 31% of active managers have outperformed a passive alternative in 2024. That’s consistent with the pattern over the past decade, where about one third of active funds outperformed their passive equivalent.

Unsurprisingly, active managers have fared worst in the Global and North American sectors, where they have struggled to match the pace set by the technology giants.

The market environment of recent years has unseated some of the best and most respected active managers, particularly those with a ‘quality’ skew to their portfolios. In mid-2024, Nick Train, manager on the Finsbury Growth & Income trust, admitted after a tough set of results: “We really should be able to do better than this and if we can’t, then I absolutely share shareholders’ growing impatience.”

Performance has improved subsequently, but it has been a tough period. FundSmith Equity has also had a tough run of performance, underperforming the MSCI World Index for four calendar years in a row.

Active funds have also had to contend with significant outflows. AJ Bell points out that retail investors have withdrawn over £100bn from active funds in the last three years. Over the past decade trackers have gone from 10.5% of the UK market, to the current level of 24%, growing from £93bn to £359bn.

See also: Analysis: The key questions for asset allocators in the year ahead

Laith Khalaf, head of investment analysis at AJ Bell, said: “Active managers aren’t just suffering in terms of performance relative to their passive peers, they’re losing the battle for flows too. The last three years have witnessed an unprecedented rout for active managers in terms of fund flows.

“Since the beginning of 2022, £105bn has been withdrawn from active funds and £48bn has been invested in passive funds, based on AJ Bell analysis of Investment Association data. The exodus from active funds shows only the most minimal signs of abating, with 2024 withdrawals on course to come in just below those of last year’s record-breaking outflows.”

There have been brighter spots. In Global Emerging Markets funds, for example, 48% of managers have outperformed passive options over five years, with many active managers swerving the problems in China, while passive funds were forced to participate fully in its weakness.

Europe has been another relative bright spot, with 47% of active managers outpacing passives over five years. This may be because weak funds in Europe have not survived.

There is a question over how long this passive dominance can continue. If the US market is a guide, there may be further to run. in the US, the value of assets in passive funds overtook active funds for the first time last year, with more than 50% of the market now managed passively. Khalaf said: “It sets a meaningful roadmap of where the UK investment industry may end up. In other words, don’t bet the house on a revival in active management anytime soon.”

This is a depressing conclusion for active managers, but also for investing in general. It means that capital is allocated on the basis of size rather than merit and may see investment moving towards those parts of the market that need it least.  

It may also be problematic for investors in the longer term. Dan Brocklebank, UK head at Orbis, said: “Global markets are increasingly concentrated in a few large, US-based companies. Investors in global tracker funds are thus becoming more dependent on the performance of a small number of companies.

“Similarly, many large active funds have high exposures to these same names, resulting in high correlations between the largest funds. This makes achieving true diversification difficult.”

What might change the dominance of passive? The most obvious trigger would be a wobble in the technology sector. The gloomy prognosis for active managers assumes that markets continue much as they have for the past decade.

There is no guarantee of that, particularly given the shift in the interest rate environment. History suggests that when markets hit this level of concentration, the reversal can be abrupt and uncomfortable. This may prompt investors to rethink their allocations to passive.

A better performance from smaller companies would certainly help active funds in certain markets. In the UK, for example, active managers tend to have higher allocations to small and mid-cap companies, and their weakness has been a persistent headwind. There are tentative signs of a shift in the outlook. UK-focused equity funds saw their first inflows in 42 months in the month after the budget, according to Calastone.

See also: CIOs name trade wars and concentration risk as 2025’s top concerns

Paul Marriage, manager of TM Tellworth UK Smaller Companies Fund at Premier Miton, said other factors could change the outlook for smaller companies in 2025.

“The chancellor’s Mansion House speech was a good opportunity to change the narrative post budget and her proposals to encourage UK equity investing are helpful, if lacking in detail,” said Marriage. “We expect the first long term asset funds (LTAFs) to start allocating to UK smaller companies in the first half of 2025. These are a very welcome new buyer to the market.” Buybacks and continued M&A could also support the sector.

ESG factors could be another consideration. Active managers are in a better position to ensure strong governance, challenge underperforming management teams, and hold companies to account on environmental or social risks. However, it remains unclear whether investors are willing to pay a premium for it.

Richard Toh is likely to remain an outlier, with most active managers holding out for a change in the unusual environment that has prevailed over the past decade rather than opting for a dramatic mea culpa. Nevertheless, for the time being, active managers remain under pressure.

This story originated on our sister title, PA Adviser.