One of them has been Jack Barrat, who runs the Man GLG Undervalued Assets fund alongside co-manager Henry Dixon. The fund is first-quartile in the UK All Companies sector over three and five years, and has shown it is possible to deliver credible returns with a value style in the unloved UK. Barrat also runs the Man Absolute Value fund.

The trick, according to Barrat, is a ‘modern’ value approach. This should be based not simply on whether a company is out of favour, in a certain sector or cheap on a price to earnings basis, but a more sophisticated analysis of its tangible asset base, the returns it can make from those assets and the share price.

Barrat says: “We spend all our time on pages 150-280 of an annual report rather than the first 20. For us, it’s much more exciting to learn about a working capital cycle or a depreciation policy within a mid-cap business than it is to go through a glossy PowerPoint presentation from a charismatic CEO.”

See also: Beneath the bonnet: The case for Shell, Nubank, Grab and luxury goods

Once they’ve established the asset base of a company, the managers will look at the cash returns that can be generated. “The cash backing of headline earnings can be very flimsy for many companies and there are frequent adjustments,” explains Barrat. They will also look at all the calls on that company’s capital, such as operating or finance leases.

This helps them avoid value traps – those companies that are optically cheap, but may have further to fall.

“These companies will not be generating cash, or have huge contingent liabilities – that means their business is very fragile.”

Barrat gives the example of one supermarket in the 2000s. The company had positive earnings and operating momentum on a headline basis, but leverage was rising, cash conversion was falling and the capital intensity of the business was growing. He says that while it looked like it was delivering well, the underlying business was weakening.

“This, for us, was a sure sign of a value trap. You can keep it going for a period of time, but there will be a moment of reckoning.”

Read the rest of this article in the January issue of Portfolio Adviser magazine

Companies paid their shareholders £92.1bn in 2024 — 2.3% more than in 2023. Excluding special payouts, however, the underlying figure fell 0.4% to £86.5bn.

Mining company dividends dropped 40%, or £4.5bn, to £7bn. Excluding miners, the headline growth rate was 8.4% over the year, while underlying growth was 4%.

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

“It is worth highlighting that dividend growth was better outside the highly cyclical mining sector,” said Mark Cleland, CEO of Issuer Services for the United Kingdom, Channel Islands, Ireland and Africa at Computershare.

“In addition, share buybacks are having an impact, diverting an estimated £42-45bn of cash in 2024 to shareholders that might previously have been paid mostly in dividends.”

Some 77% of companies either raised dividends or held them steady in 2024, while the median per-share growth rate at company level was 4.5%.

Elsewhere, banks, insurance companies and food retailers were the largest contributors to growth, while housebuilders were affected by large cuts from Bellway and Persimmon.

2025 forecast

Looking ahead, Computershare anticipates a muted outlook for payouts in 2025, with median dividend growth per share expected to continue at 4-4.5%.

Headline dividends are expected to reach £92.7bn — up just 0.7% year on year — while the underlying total (which excludes special dividends) is set to rise 1% to £88.2bn.

Computershare’s Cleland said the predicted typical company dividend growth for 2025 is “modest” in the context of UK inflation, and will be impacted again by some notable cuts in the year ahead.

“The report indicates that sharply rising borrowing costs will affect government finances, economic growth, business investment, profit margins and consumer spending.

“These higher market interest rates will likely have an impact on the ability of companies to generate cash for shareholders.”

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

David Smith, portfolio manager at Henderson High Income trust added: “The impact of the UK Budget is likely to curtail dividend growth for some domestic businesses given corporate margins are coming under pressure from the increase in National Insurance and minimum wage. However one must remember that 75% of the UK market’s revenues are derived overseas where the global economy is improving.

“Additionally the outlook for dividends in the banking sector is robust, especially in an environment of higher for longer interest rates, while the negative impact from dividend cuts in the mining sector is coming to an end.

“The trend for companies to buy back their shares with excess cash at the expense of special dividends continues, however, underlying dividend growth next year should be supported by international earners and banks, while dividend cover for the UK market in aggregate is healthy.”

Major European energy firms are poised to offer “big strategic value” as the world transitions towards decarbonisation, according to JOHCM’s Ben Leyland.

Leyland, who co-manages the JOHCM Global Opportunities fund alongside Robert Lancastle, cited UK oil giant Shell as being primed to benefit from this long-term theme over the next decade and beyond. Shell currently accounts for a 3.3% weighting in the fund, according to its December factsheet, marking it as the seventh-largest position within the 39-stock portfolio.

“What we’re really interested in is the need to invest in energy infrastructure over the next 10 to 15 years, and to move energy infrastructure broadly in a decarbonised direction,” he explained.

“It’s not about taking clear views on whether this is solar, wind, renewables or nuclear – or on whether carbon capture and storage, or hydrogen technologies, are the next big thing. These have their moments in the sun and then dissipate.”

In terms of European energy majors generally, Leyland said they tend to focus more on ‘midstream’ and ‘downstream’ opportunities as opposed to ‘upstream’. ‘Upstream’ refers to the exploration and production stages, while ‘midstream’ includes storing, processing and transporting oil, natural gas and gas liquids. The ‘downstream’ stages involve refining crude oil into fuels.

Leyland explained: “The recent action to launch US energy measures has been to double down in upstream.

“What we like, particularly when it comes to Shell, is that while they do have upstream [capabilities], the real value of the company is the midstream and downstream assets, which ultimately are going to have
big strategic value in the transitioning world.”

He added that Shell’s gas-trading division is also attractive, which was supplemented by the firm’s £47bn acquisition of gas exploration firm BG in 2015.

“There are multiple positives. The fact that LNG [liquefied natural gas] is a tradable transition fuel to help the world towards the decarbonisation agenda is one. Also, the fact Shell is paring back its downstream assets and moving its refinery hubs towards areas such as Rotterdam.

“These areas are well located in that they are industrial hubs for other hard-to-help sectors. So, steel-making or cement companies, which are going to find it very difficult to meet all of those net-zero targets – they are going to need technologies like carbon capture and storage in order to make those commitments real.”

Leyland added that Shell is one of the largest petrol station forecourt providers in the world. According to the company’s website, it has 40,000 forecourt locations across the globe as well as an additional 10,000 partner sites. In the UK, Statista figures show that Shell has the second-highest percentage of forecourts at 13.9%, second only to Esso at 15.2%.

“It’s up to [the consumer] whether they buy a petrol, diesel or electric [car], but at some stage, if we’re going to go down the EV route, we’re going to need charging stations for that. As the strong become stronger, the large will become larger. The tail of smaller companies, which cannot make that transition as effectively, is going to start atrophying.

“So this, alongside the strategic value of its midstream and downstream assets to help the energy transition, is what we think will help Shell generate strong returns.”

‘Where profit and purpose go hand in hand’

Nubank and Grab are two stocks which are tackling significant global challenges but are also set to generate strong long-term returns, according to Baillie Gifford’s Rosie Rankin.

The investment specialist director said Brazilian firm Nubank, which is held within the firm’s £1.9bn Positive Change fund, is one of the world’s largest digital banks. Currently headquartered in São Paulo, the Russell 1000 component was founded in 2013 and has more than 7,000 employees. According to a Bloomberg report in November, however, the bank’s parent firm Nu Holdings is considering moving its legal base to the UK.

“[Nubank] was founded with the intent of providing an alternative to the relatively expensive traditional Brazilian banking system,” Rankin explained. “When we first invested, it had around 58 million customers in 2021. Fast forward to today, and that’s around 100 million customers.

“It is incredible growth in a relatively short period of time, and that’s because it’s offering products and services that are really useful to micro and small enterprises.”

Seven out of 10 new jobs created in Brazil are now within micro and small enterprises, according to Rankin, meaning the ability to access affordable banking products easily is an “important driver for change”.

Similarly, an impact stock capitalising on the growing digitalisation across emerging markets is Grab, which she describes as a “southeast Asian super-app”. “Its core businesses are ride-hailing and restaurant delivery, but it does a whole range of stuff, from delivering packages and groceries to e-wallets and financial services. As a result, it has managed to build up a really impressive market share.”

Grab Holdings, which is based on One-North in Singapore, operates across Malaysia, Indonesia, Myanmar, Thailand, Vietnam, the Philippines and Cambodia, as well as its home market.

Hailed by Reuters as the biggest technology company within the south-east Asian region, the company was founded in 2012 and floated on the Nasdaq in 2021, following a SPAC merger with US investment firm Altimeter.

According to Rankin, Grab currently accounts for 70% of the entire ride-hailing market, within around 5% of adults in south-east Asia using the app at least once per month. “That means 95% don’t, so there’s huge potential there in terms of growing the number of users,” she reasoned. “And because it’s so innovative in developing technology solutions, it has been a real magnet for attracting tech talent.”

Rankin added: “Grab has many different services via its app, but they’re united by that one purpose of helping to improve lives and prosperity within south-east Asia. And so, ultimately, it’s a great example of a business where profit and purpose will go hand in hand.”

Through the lens of luxury

Investors shouldn’t give up on luxury goods stocks despite lacklustre results from the sector, according to senior analyst at Killik & Co Mark Nelson, who said the firm’s managed investment service team is taking “a defensive approach” to these types of companies.

“Luxury stocks have been getting a lot of attention of late, with softness in the market being largely driven by the continued weakness of the Chinese economy,” he explained. “The current predicament raises two big questions for investors: is there a long-term structural issue in China and, if that is not the case and it is just a cyclical downturn, when will the good times start to flow again?”

One stock the team owns shares in is Franco-Italian eyewear company EssilorLuxottica, which Nelson said combines a medical device business through its lenses, with a luxury goods one through its frames.

“[It] plays to the structural trend of the growing need for eyecare due to the increasing prevalence of eye conditions among the growing population due to changing lifestyles and demographics. Management has stated that 75% of revenues are vision care-related and therefore less discretionary in nature.”

Generally speaking, the team at Killik doesn’t think the slowing luxury demand in China is structural, despite the fact many investors are drawing comparisons between China and Japan in the 1980s. “While there are similarities such as ageing populations, there are some key differences, too,” Nelson pointed out. “For a start, there remain millions of people who have not yet reached middle-class status in China, and it is this emerging middle class that has been a key driver of luxury goods demand.

“China is an ambitious nation, with grand geopolitical goals which we believe are more likely to be achieved with a prosperous population and a growing middle class. We therefore expect the Chinese government to do whatever it takes to provide the economy with the necessary support in pursuit of these goals.”

In terms of when the performance of the luxury goods sector will turn around, the analyst said this is “much trickier to predict” but that there are “early causes for optimism”.

“China does seem to be making significant attempts to re-ignite the economy via stimulus measures. Additionally, the easing of the interest rate cycle in the developed west should be supportive of increased demand for those markets,” he reasoned.

“Finally, Trump’s election in November’s US election is being seen as a positive for the sector overall, with lower taxes and a currently buoyant stockmarket,both positive for the wealth effect and, in turn, luxury demand in the US.”

Not only this, but lower valuations in the sector could make it ripe for M&A deals, according to Nelson, with Italian luxury fashion brand Moncler allegedly interested in acquiring British fashion house Burberry.

This article first appeared in the January issue of Portfolio Adviser magazine

DeepSeek’s model showed results on a similar level to OpenAI’s ChatGPT at 5-10% of the cost.

Nvidia fell 16.86% on Monday, marking the worst losses for a single stock on record in terms of market cap.

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

DeepSeek’s model could rewrite the investment case for artificial intelligence, according to Kenneth Lamont, principal at Morningstar.

“Until now, the conventional wisdom has been clear: the best AI models rely on massive datasets and immense computational power, rewarding scale and favouring hardware giants like Nvidia and Europe’s ASML.

“But DeepSeek’s latest innovations are turning that assumption on its head. The start-up’s new models demonstrate how efficiency gains in AI development can reduce reliance on brute-force computing power. This breakthrough slashes computational demands, enabling lower fees — and putting pressure on industry titans like Microsoft and Google to justify their premium pricing.”

He added that, with many investors heavily exposed to AI’s biggest players, disruption in the sector could ripple through portfolios.

Despite the market shock, Neuberger Berman head of thematic – Asia Yan Taw Boon says the trend is not something new.

“China has always been able to cut the corners and re-create a technology [which somewhat already exists] at a much lower cost given the efficiency ‘DNA’. DeepSeek also said that their key bottleneck is in advanced AI/GPU chips. China is still 4-5 years behind the western world in leading edge semiconductors.

“Without leading edge chips, DeepSeek admits that they can’t scale up their model for a larger user base.”

What next for AI?

Mark Hawtin, head of the Liontrust global equities team, believes the news does not tarnish the investment case for AI.

“We have been crystal clear that the opportunity for AI is immense and nothing in the DeepSeek news changes that. In fact, it can only help the speed of adoption as the infrastructure becomes cheaper and cheaper and potentially a commodity.

“It’s worth flagging Jevons Paradox. When Jevons studied coal consumption in relation to steam engine efficiency in the mid-19th century, he noticed that as steam engines became more efficient, coal consumption increased rather than decreased. As AI gets more efficient and accessible, we could likely see AI skyrocket and turn into a commodity.”

See also: Evelyn Partners sells fund solutions business to Thesis

He adds that AI infrastructure players may well become victims of the “right thesis, wrong valuation” mantra.

“However, there will be a broadening out of the opportunity set. Users of AI to drive productivity and stronger moats will prevail.

“This is early in the cycle and there will be some amazing investment opportunities. Any turmoil around the theme in the short term should be seen as a chance to position portfolios to AI use case winners.”

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

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.”

The combined fund will manage over £330m assets and will be managed by Philip Wolstencroft (pictured).

Wolstencroft, who founded the ‘SmartGARP’ systematic investment process, has managed the fund since its launch in March 2001.

See also: IA: UK reinvests in November following two months of exits

The strategy is a top quartile performer in the IA Europe ex-UK sector over one, three and five years, according to FE Fundinfo data.

Wolstencroft said: “In our fund we own stocks with a historical yield of over 4%, and the growth rate in earnings and cashflows for these companies has been averaging about 7% per annum for the past decade.

“Given that the return from any asset is a function of its yield plus its growth rate, I’m positive on the outlook for the fund.”

The £22.5bn fund rose by 8.9% in 2024, trailing both the MSCI World Index (up 20.8%) and the IA Global sector average of 12.6%.

In an annual letter to shareholders, he said a “longer-term perspective may be useful” and is more consistent with the fund’s investment aims and strategy.

Since inception in 2010, Smith said the fund has returned 2.7% more than the index per year with less downside volatility, with a Sortino Ratio of 0.87 against 0.60 for the index.

Smith said that market concentration made it a particularly difficult year to outperform, with just five stocks making up 45% of S&P 500 returns in 2024.

While US tech giants Microsoft and Meta were the two most positive contributors to performance over the calendar year, the fund’s performance has been hurt in recent years by the performance of Nvidia particularly, which is not in the Fundsmith Equity portfolio.

See also: Alex Game appointed to Liontrust UK equity funds as Julian Fosh retires

“Clearly investors want active funds to outperform all the time, but that simply isn’t possible, especially in current market conditions,” Laith Khalaf, head of investment analysis at AJ Bell, said.

“Indeed the question at present isn’t so much whether Terry Smith is underperforming the MSCI World Index, but whether the index is outperforming Smith and his fellow active managers.

“As detailed in our latest Manager versus Machine report, only 18% of active managers in the Global sector outperformed the average index tracker in 2024 to the end of November, and only 17% achieved this feat over the longer, and hence more substantive, period of 10 years.

“A large part of the strong index performance has been driven by a relatively small number of big technology names, which hold such a high weighting in the index that active managers are unlikely to be anything other than underweight this grouping, known as the Magnificent Seven, as a whole.”

Weight loss drugs impact alcohol stocks

Smith also revealed that the fund has sold its stake in Diageo amid concerns over the impact of weight-loss drugs on demand for alcohol.

Fundsmith has held a position in Diageo since inception.

“We suspect the entire drinks sector is in the early stages of being impacted negatively by weight loss drugs. Indeed, it seems likely that the drugs will eventually be used to treat alcoholism such is their effect on consumption.”

Brown-Forman, one of the world’s larges drinks companies, was one of the largest detractors over the year. Smith said that the stock has suffered from the fall in consumption from the pandemic highs and is “probably seeing early signs of the adverse impact of weight loss drugs”.

However, retaining Brown-Forman “keeps a foothold” in the drinks sector.

Smith added that the shift in consumption habits may lead to a larger bias towards premium spirits, which may help Brown-Forman to negate the impact of weight loss drugs, with consumers potentially drinking less but opting for higher quality.

“It is a company which survived Prohibition so we hope there is literally something in the DNA to help with these adverse circumstances.”

See also: 30-year gilt yields hit 27-year high

The Aegon Sustainable Diversified Growth and Aegon Sustainable Equity funds intend to adopt the label from the end of March 2025 following shareholder notification.

Aegon also confirmed the Aegon Ethical Equity fund, Aegon Ethical Corporate Bond fund and Aegon Ethical Cautious Managed fund will not have UK sustainability investment labels, as they operate exclusionary screens and do not fit within the label categories defined by the FCA. However, they will be in the unlabelled with sustainable characteristics category, which will result in disclosures aligned with the labelled funds to ensure transparency.

Miranda Beacham (pictured), head of responsible investment at Aegon, said: “We are very pleased to see SDR is gathering momentum in providing greater clarity and confidence in the market for our clients and look forward to adopting the new labels for our funds.

“Our ethical franchise, remaining unlabelled with sustainability characteristics, will continue to be entirely unambiguous in its goals, an attractive proposition to some investors looking to align their values and views on responsible investing.

“Indeed, our Ethical Investor Survey – carried out every two years – ensures our funds stay aligned both to these goals, and also with societal changes.”

This story originated on our sister title, PA Future.

Adjusted for inflation, most private client portfolios are at a similar level to 2017, with real returns needing to average 6.6% over the next decade to revert to the historical norm of 4% per year.

Inflation spiralled in 2022, reaching a high of over 11% in the UK before inching back towards the Bank of England’s 2% target over the last 18 months. Meanwhile, returns were also down that year with the MSCI World falling 7.8%.

In 2024, private clients made average nominal returns of 8.4%, compared to the historical average of 6.1%.

ARC collects the actual performance of over 350,000 portfolios (net of fees) from 140 investment managers to establish the returns being seen by real clients.

See also: Calastone: Equity funds pull in record £27.2bn inflow in 2024

Shaun Le Messurier, director at ARC Research, said: “Investors may be relieved to see the value of their portfolios back at pre-2022 levels but it is important to consider portfolio returns after inflation has been taken into consideration.

“Our data shows the extent of the damage caused by the market events of 2022. Despite Steady Growth portfolios, which are the most popular among private client investors, generating above-average real returns for the second consecutive year, these portfolios remain 12% below 2021 levels in real terms – and significantly below the 4% a year real target return.”

The firm recently conducted a sentiment survey of CIOs, which found trade wars, inflation and equity concentration to be among the top concerns in the coming year despite a positive sentiment towards equities.

Following Donald Trump’s US election win in November, fears of potential trade wars and supply chain disruption have grown sharply.

According to the survey of 98 CIOs, there is also a lingering unease about persistent price pressures and monetary policy responses.

According to Calastone’s latest Fund Flow Index, global equity funds were the largest beneficiaries, with £19.5bn of net inflows over the course of the year.

The enthusiasm for equities did not translate to UK equity funds, however, suffering £9.6bn outflows. This marked the sector’s ninth year of outflows and its worst year on record relative to the broader market.

European equity funds posted a record year for flows, pulling in £3.2bn, while emerging market funds enjoyed their second best year on record.

See also: UK retail equity ownership the lowest in the G7 as abrdn urges action

Asia-Pacific also shed record outflows, with the £1.8bn the most the region has seen in a calendar year.

Greater China funds also suffered outflows, while Japanese equities pulled in a record £1.59bn to the sector.

Edward Glyn, head of global markets at Calastone, said: “Global funds are dominated by US stocks already, but the additional focus specifically on that region shows that investors are doubling down on Wall Street. Purchases were very front-loaded in the year, however, and there has been greater wariness as markets have tested new highs.

“A correction in August and a wobbly December for global markets have reminded investors that risks abound. The bond markets are the place to look for these signals. The summer saw fears rise over government deficits and inflation; this has pushed yields in many major bond markets back towards the 15-year highs we saw at the beginning of 2023 – and bond prices lower as a result. Consequently, equities look more exposed, especially in those parts of the world where they have raced ahead.

“That does not include the UK. The UK stockmarket badly underperformed most of its peers in 2024 and this has only intensified the extent to which UK-focused funds are being shunned by investors. The last year to see significant inflows was 2015. Since then, £45bn has been withdrawn from the sector. UK equity valuations are clearly cheap, but investors are capitulating, seemingly giving up hope that a long-awaited re-rating will occur.”

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

Fixed income funds saw inflows drop to £1.3bn in 2024, down considerably from the £7.7bn that flooded into the asset class in 2023. Flexible bond funds particularly suffered, with investors pulling £3.35bn from the sector.

Bond market weakness aided money market strategies, which had their best year ever with £1.86bn inflows.

Mixed asset funds also enjoyed their strongest year since 2021, enjoying inflows of £14.6bn.

By style, passives dominated with £29.6bn inflows. Investors redeemed £2.4bn from active funds over the year.

Some British companies such as Gamma Communications, 4imprint and CVS appear in the top holdings of a number of UK small-cap funds, despite it being a broad investment universe. Not to mention, each of these companies have a market cap in excess of £1bn – not the price range most people have in mind when they picture smaller companies.

In the Rockwood Strategic trust, manager Richard Staveley will only invest in companies below £250m to keep the focus on this lower end of the market.

He says: “This industry can sometimes not think about the real world. They are telling the truth in that they are the smallest companies in relation to the largest ones. But in the real world, they are not really small.”

See also: UK small caps: Depressed for a reason, or at the cusp of a multi-year supercycle?

Indeed, the definition of what a smaller company is can vary considerably from manager to manager.

“There is no agreement on what small is – it is all relative. I don’t think there is a mis-selling scandal here, but funds must be transparent about the average size of the companies they are invested in.”

A shrinking market

A key reason why these funds have ended up holding the same stocks is because the number of smaller companies in the UK is shrinking. Valuations were spread more evenly across the market when the Numis Smaller Companies index first launched in 1987, but widespread M&A activity has meant much of the wealth is now concentrated in fewer names.

For example, the largest company in the bottom 10% of the market was worth £108m in 1987. Today, that same company has a market cap of £1.7bn.

To read more visit the February edition of Portfolio Adviser Magazine