In this article we explore the origins of a systematic UK Equity Income strategy now powered by Elston’s Minerva™.
UK equities are a helpful value-factor proxy. Value-based investing is a persistent driver of returns over time. But not all the time. We explore UK equities’ embedded factor tilt and how it can help diversification.
The UK equity market has underperformed the US and Global Equity over the long-term. How much should UK investors allocate to it?
Transatlantic security is going through a reset. Europe needs to shift to hard power to guarantee its own security.
Trump’s chaotic tariff policy is destabilising markets and raising concerns around impact on US economic growth and inflation.
 How are ESG focused indices different from traditional indicesESG indices take the same universe of companies as a traditional index but make rules-based systematic adjustments. For example, a set of ESG index rules might exclude companies with exposure to alcohol, tobacco, fossil fuels, weapons manufacturing, and adult entertainment. Furthermore, the rules might adjust the weighting of the company based on its ESG score. Why are ESG indices important?ESG indices are used by ESG-focused index tracking funds and ETFs. By comparing the performance of ESG focused indices and traditional indices we can see whether or not the ESG focus positively or negatively impacted performnace relative to traditional equity indices. Whilst pre-2022 some have argued for an ESG premium over the long-run (good companies should be well rewarded via a lower risk premium), since 2022 the hard reality of ESG relative underperformance compared to traditional equities is a reminder that any such premium is indeed "long-run", and in the meantime, short- and medium-term performance differentials matters too. What are the main differences between ESG focused indices and traditional indices?Whilst methodologies will vary from index to index, at a high level the key difference of ESG indices and funds to traditional indices and funds is:
When did ESG performance shine?The Covid era seemed like a golden era for ESG funds and they received record inflows. ESG focused world equity indices slightly outperformed their parent indices in 2020 at a time when the world stood still and the oil price briefly went negative. Investors could get similar or better returns, and have a clearer conscience. What changed in 2022?A combination of pent-up demand, monetary supply and then the Russia-Ukraine war and related sanctions and energy crisis marked the return of inflation. ESG focused funds excluded fossil fuels and materials and so did not hold "inflation protective" sectors that traditional equity indices continued to hold. We explored this further in our published inflation-related research at the time. Why were ESG funds less resilient to the inflation shock?Ironically, the exposures that do best in an energy shock and a higher inflation era, such as energy, materials, and commodities are the sectors that were excluded or low-weighted in ESG focused indices/funds. Similarly following the Russia/Ukraine war and heightened geopolitical risks, the defence sector has performed very strongly: this is part of traditional indices but not part of ESG indices. What is the difference for ESG indices pre and post Covid?In summary, ESG indices fared similarly to traditional indices pre-Covid, fared slightly better than traditional indices during Covid, and have fared worse than traditional indices since Covid. We are now living in a higher inflation era, with changing energy supply chains and an era of geopolitical insecurity. Furthermore with the new US Presidential administration under Donald Trump being pro-oil and less generous to clean energy, these trends could continue. How should advisers navigate clients' ESG preferencesIncreasingly advisers want or need to take clients' ESG preferences into account. Some clients may have a ESG preference, so long as returns are not compromised. Other clients may have a ESG preference as a priority over returns. Having an informed discussion about the differences between traditional and ESG investing can help explore these preferences in a more informed context. ESG is struggling in a world of energy supply changes and increased defence spendingThe chart below shows the performance lag between a Socially Responsible world equity ETF and a traditional world equity ETF. The ESG-focused Socially Responsible ETF started materaily underperfomring from December 2021, just before the Russia-Ukraine war and related sanctions disrupted energy supply chains and forced the US and Europe to rethink their need for defence spending.   How hard is it to beat the world equity indexA world equity index is hard to beat. And, according to the SPIVA studies, very few active global equity managers do so persistently. Listed Private Market Managers have persistently outperformed world equitiesAnd yet, an index-tracking fund that tracks an index of the largest listed private market managers (firms such as Apollo Global Management, Blackstone, Brookfield, KKR and 3i) has persistently outperformed a broader world equity index since 2008. This persistent long-term outperformance is one of the reasons we like including Listed Private Market Managers as an exposure within portfolios we consult on. What is the return premium for Private Market Managers?We refresh our regular study and find that the long-term (since 2008) premium of Listed Private Market Managers performance over Public Equities increased from +3.2% at end 2023 to +3.4% at end 2024. For investment committess targeting a net return of say World Equities +2%, net of fees, exposure to a simple Private Market Managers ETF has consistently delivered persistent alpha. How did Private Market Managers perform in 2024?In 2024, Private Market Managers was one of the best performing asset classes, returning +31.7%, compared to +17.3% for World Equities, both in GBP terms. What is the right "PME" benchmark for a private equity fund?This raises the question should private equity funds aim to deliver returns above public equities (represented by a world equity index), or should they aim to deliver returns above the returns of a listed private market managers index (on a public market equivalent ("PME") calculation basis)? We think the latter: but we don't expect many to accept the challenge. What are the risks?Unsurprisingly, Listed Private Market Managers is a higher beta index, relative to a world equity index. This means when markets are up, they go up more. When markets are down, they go down more. The performance of Listed Private Market Managers experienced a major dip in 2022 as interest rates rose rapidly. This was because of the exposure of private market funds to rising borrowing costs. This made the sector even more sensitive to rising interest rates than the Property or Infrastructure sector, within the Alternative Assets basket. What about the "illiquidity premium"?We prefer not to have exposure to illiquid funds in any portfolio we consult on for our UK financial adviser community. Why? Because we think the "illiquidity premium" is elusive: hard to harvest if things go well, and evaporating quickly if things do not. What does this mean for investment committees?
How can UK advisers get exposure?This exposure is readily available via a London-listed ETF launched back in 2007. There is nothing new about this exposure, but it is certainly worth taking a fresh look. For platforms that cannot trade ETFs, advisers can consider a Alternatives fund that includes an allocation to a Listed Private Markets Manager ETF. Find out more  The Bank of England, the UK's central bank, today cut rates by 25bp from 4.75% to 4.50% on weaker than expected economic growth. What is the market reaction?The market reaction is an increase in the FTSE 100 for two reasons: firstly lower borrowing costs are positive for corporate earnings, secondly Sterling has weakened on the news (reflecting the weaker economic growth outlook). Because FTSE 100 companies have predominantly USD-linked earnings, the translation effect makes the FTSE 100 look higher when Sterling weakens relative to the Dollar. What is the outlook for the UK economyWe focus on the three key macro drivers for the UK economy: Growth, Inflation and Rates. The Bank of England's central projections consistent with the MPC's forecast were changed as follows, relative to their November 2024 meeting: 2025 GDP Growth was downgraded from +1.50% to +0.75% 2025 CPI Inflation was upgraded from +2.75% to +3.50% The expected interest rate at the end of the three forecast period were increased from 3.50% to 4.00%. In summary this shows lower growth, higher inflation and higher terminal rates. (See chart) Might the Bank of England cut more?The Monetary Policy Committee (MPC) vote was 7-2 in favour of a 25bp cut. Interestingly 2 voted to cut rates even deeper by 50bp to 4.25% to support economic growth SummaryAfter being slow to respond to the inflation shock in 2022, it now looks as though the Bank of England may have overtightened relative to growth and is now exposed to "stagflation risk". Stagflation is when the economy is caught in a lower growth and higher inflation trap. This will be a challenge for policymakers to navigate.
 In this article for Professional Adviser, Hoshang Daroga explores what makes the US stock market exceptional and whether its outperformance is sustainable.
Read the full article  What is Deepseek?
The new Chinese AI tool is the most downloaded app in the US and claims to be able to operate quicker and more cheaply than Chat GPT. By requiring fewer chips and smaller server farms, DeepSeek can deliver its AI generated results, which incorporates self-corrective learning, at lower cost. The arrival of DeepSeek in the AI field creates a challenge to Chat GPT and also means more could potentially be done with fewer advanced chips. The DeepSeek app is free, and its code is open source, which means companies in the US can easily create similar copycat versions of it. Its AI model is called R1 which has some 670 billion parameters, making it the largest open-source LLM (large language model) yet. The R1 is unlike traditional models that immediately generate responses. The R1 are trained to think extensively before answering. Its approach is similar to how a human carefully considers a complex problem before answering it. The method is known as test-time compute and requires the model to spend up to minutes working through its chain of thought. The company estimates it has cost $6 million to train the model compared to other AI models which cost over a $100 million each. The app challenges the notion that the only way of building better AI models is by spending large amounts of money buying high powered processing chips. What happened to NVidia stock? Lower potential demand for chips has led to a rapid sell-off in NVidia shares, which declined -17% in 1 day on 27th January 2025. Because of NVidia - and the broader technology sector's high exposure within the S&P 500 this led to a US equity market sell off, dragging down market-cap weighted world equity indices too. Other stocks which suffered similar down moves were Oracle (-13.79%), Cisco (-5.06%), Broadcom (-17.40%). These companies along with Nvidia provide important components in building data centers and digital infrastructure to support training AI models. NVidia released a statement saying "DeepSeek’s work illustrates how new models can be created using that technique, leveraging widely-available models and compute that is fully export control compliant." While President Trump said the breakthrough in technology is a positive for America and that it is a wake-up call for US tech firms to not rest on their laurels. Elevated concentration risk in the US equity market is well-documented and one of the reasons we recommend advisers we work with to balance traditional S&P500 market-cap weighted exposure (which was down -1.46%) with S&P500 Equal-Weighted exposure (which was up +0.03%), and also for active selections within Sectors and Styles. How much NVidia is in a portfolio? For a balanced, well diversified portfolio built with funds, direct exposure to NVidia should not be more than 2% or so. This reflects the importance of diversifying away from stock-specific "idiosyncratic" risk. Creative disruption requires diversification As with any paradigm shift, it's hard to identify clear-cut winners in advance. We welcome the AI revolution as a broader technological innovation theme to consider within portfolios. But this episode emphasises the value of having a diversified approach. |
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