Neil Birrell, Premier Miton’s Chief Investment Officer and lead manager of the Diversified fund range looks at what is in store for the funds in 2025.
A quick look back at 2024
The Diversified fund’s investment team came back to the office after the Christmas break last year in an upbeat mood. We’d had a good final quarter of 2023 as excitement over the peak in the interest rate cycle took hold. Bond yields had fallen and equities globally had a good time (with UK small and medium caps doing well and the Magnificent 7 less well), which suited us. Importantly for the Diversified funds, property companies recovered strongly after a tough period and the allocation to alternatives through investment companies had a similar experience.
As we rolled through the first quarter of 2024, the story remained the same, then the AI frenzy took hold and the giant US technology stocks led the way, driving global indices higher. It was difficult to keep up with that, but as most asset classes climbed, the funds did fine.
The final quarter of the year was more problematic for the funds. We switched a large portion of the UK equity exposure (whilst retaining a significant amount) into global equites, which was a good decision, but we had been reducing our technology weighting (including selling out of Nvidia), so on a relative basis struggled somewhat. Furthermore, as expectations for interest rate cuts moderated, property companies and alternatives suffered, resulting in a tough end to the year for the Diversified funds.
So much for 2024, onto 2025
Economic outlook
We have been getting guidance from the major central banks on monetary policy. Expectations are that interest rates will continue to fall, but not on a steep path, as inflation remains a concern. However, the prospects for economic growth are not overly promising, although the US may well be the exception to this, as expansionary Trump measures kick in. But I don’t think the immediate post-election growth expectations will be met and we may need to moderate hopes. However, to be clear, the world’s largest economy is in good shape, allowing the Fed to focus on inflation and be a bit more hawkish in policy.
The outlook for Europe and the UK is less good. The ECB has provided much needed stimulus and is likely to continue to do so, whilst the Bank of England has taken its foot off the pedal. This does, of course, elevate the risk of recession, in fact, the final GDP numbers for the third quarter show that the UK economy did not grow at all and in a more forward looking analysis, the Confederation for British Industry (CBI) are very gloomy in their outlook. The CBI is a voice of businesses across the UK and as such, does have a bias, however, it is suggesting that inflation remains an issue, the jobs market is under pressure and recession could be looming. In the face of all this, the Bank of England has resisted calls to reduce interest rates and the path downwards through next year is not a steep one.
Elsewhere, the Chinese authorities are having to provide significant support for its ailing property sector and broader economy and will be concerned about possible trade tariffs from the US. Meanwhile, Japan will not be leading the world into a new growth phase. As usual, the US is crucial in driving global growth, but the overall outlook is not exciting, however, if needed, central banks have plenty of scope to cut interest rates, but government fiscal policy is much less adaptable.
Financial markets
2024 was, yet again, a volatile year.
Bonds led the way in the volatility stakes as macroeconomic factors continued to drive asset prices, with the world’s benchmark bond yield moving dramatically.
US 10 Year Treasury bond yield 31.12.2023 – 23.12.2024
Source: Bloomberg. Past performance is not a reliable indicator of future returns.
As we enter 2025, with interest rate cut expectations reigned back in, it may be that a yield of over 4.5% on the 10 Year Treasury and also the 10 year Gilt are starting to look attractive. Over and above that, the risk reward available from high quality corporate bonds is more compelling.
Equity markets, on the other hand, cannot be called “cheap” overall. The US market dominates the world market and, at the time of writing this, just before Christmas, year to date returns from the Nasdaq Composite Index of over 30% and the S&P 500 Index of nearly 25%, driven by the Magnificent 7 and big technology companies, have left valuations looking stretched by historic standards.
Not everywhere did as well though. At home, the FTSE 100 Index rose 4.5%, although much of Europe did a bit better than that, Japan was strong in Yen terms and China made good ground. But we enter 2025 with the economic backdrop less supportive. There are therefore concerns that earnings growth can push equity indices higher when valuations, overall, do not provide much support.
In other asset classes, a very strong gold price (up 28.8% over the year to 23 December) has left it near all time highs. I don’t pretend to understand gold, but such a move could leave it at risk, although recession fears should provide support. As for Bitcoin and other crypto-currencies, words, literally, fail me.
As we enter 2025, I think a combination of an uncertain outlook for economies and interest rates and stretched valuations in parts of the equity market, will mean that volatility prevails and there is clear downside risk in some areas.
However, there are also many opportunities to take advantage of, which bring me onto…
The positioning of the Diversified funds
This applies to all the funds, although the specific requirements of the Diversified Income Fund and Diversified Responsible Growth Fund, mean that the underlying holdings will vary in those.
We remain keen on the returns available from bonds. The focus on high quality corporate issues is at the core of this, where the financial sector plays a big part, and we believe that provides a bedrock to the return expectations and risk profiles we are looking for. The Fixed Income team has demonstrated it can add value through individual bond selection, trading new issuance and active duration management, which further supports the allocation, which remains at the high end of where it has been historically.
The equity allocation is at the lower end of historic levels, with the weighting to the UK at a low, within that. Whilst the UK looks cheap by historic and international comparison, we are concerned about the economic backdrop. Having said that, we do find fantastic opportunities. In this note Jon Hudson, who manages the UK equity portfolio, along with two of Premier Miton’s UK equity funds, discusses Wise plc, one of the largest equity holdings in the Diversified growth funds. With opportunities like this, we are happy to keep money invested in UK equities.
The global ex-UK equity portfolio struggled in 2024. A very low Magnificent 7 exposure, somewhat mitigated for part of the year by other technology holdings, did hurt. We have a bias towards high quality companies with good growth prospects at reasonable valuations across a range of sectors. Our view is that those types of companies will be in demand from equity investors in a more challenging economic and market environment, when growth will be hard to come by and corporate fundamentals should come to the fore. The US is a sizable weighting and should benefit from stronger economic conditions relative to elsewhere.
The property company exposure had an amazing final quarter of 2023, consolidated through 2024, before a poor end as UK interest rate cut hopes faded and there were a number of specific factors in Spain, Germany and France that impacted. It felt like share prices were moving to factor in the worst outcomes, when we believe those issues are transitory and the company fundamentals remain robust and attractive, leaving valuations at levels rarely seen. We think the exposure will be a major contributor to returns again.
It was a similar story for the alternatives exposure held through investment companies. This is the case across many underlying asset classes, including infrastructure, energy, hedge funds and specialist lending.
We retain tail risk protection for those unforeseeable events and valuation driven sell offs and have recently added some put options should volatility prevail in an equity market that feels somewhat complacent over the risks out there at present.
As ever, the funds remain highly diversified at asset class level, and within each asset class, and we focus on what we believe to be the most attractive areas of the different asset classes.
To sum up
It was a tough end to 2024 for the funds, which impacted performance. However, over time, the investment process and decision making has proven itself, and as I look at the economic and financial market outlook for 2025 and beyond, the asset allocation of the funds and the positioning within asset classes, and I may sound like a broken record here, but I remain confident of the long term returns we, as a team, can produce across the fund range with the associated risk profiles.