Asset Allocation Research for UK Advisers

We look at the latest data from the SPIVA® Europe scorecard and key findings.  UK Small Caps are one of the few bright spots.

Over $2.5 trillion has been switched from actively managed to index-tracking funds.  What does this mean for providers?

In this article we contrast traditional market-cap weighted index with an Equal Weighted index. 

[5 min read, read as pdf]
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• The US economy outperformed expectations
• The long-awaited pivot came through
• Portfolio resilience proved key

As we look forward to 2025, it is worth revisiting the themes and predictions of our 2024 outlook “turning the corner” to get a sense of what we anticipated at the time, how this informed our recommendations to UK adviser firms’ investment committees.  Asset class performance for 2024 is summarised in the chart above.  Our 2025 outlook is published separately.
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Steady as she slows
In 2024, we anticipated a gradual deceleration in the U.S. economy, with markets pricing in the likelihood of a slight recession. In the event, the U.S. economy surprised on the upside. Growth forecasts were upgraded from 1.15% at the start of the year to an impressive 2.6% by year-end. This revision supported robust equity market returns and served as a reminder of the resilience of U.S. economic fundamentals.  In summary, a resilient US economy defied expectations.
What did we recommend to our clients at the outset and during the year? We took a balanced view between accepting concentration risk (traditional S&P 500) and diversified (active, sector exposures).  We also recommended clients lean in to broader US equity corporate landscape via 1) Equal Weight and 2) US Small Caps exposures.
By contrast, the UK had that shrinking feeling as regards economic growth, and although out of a technical recession, we are not confident of its prospects relative to the US.

Pause before pivot
At the close of 2023, we were focused on the Federal Reserve’s pause in interest rate hikes, noting that a rate cut was a question of when, not if. While the consensus view was that the first cut would be announced by mid-2024, we anticipated that the timing would hinge on the performance and strength of the U.S. economy. Indeed, the economy’s resilience delayed the start of what we anticipate to be a rate-cutting cycle to September 2024, when the Federal Reserve finally delivered a significant 50-basis-point cut.
In fact, the eventual BoE Fed pivot came a month or two later than we had estimated at the start of the year, but we recommended our clients remain dynamic with regards to duration management.  We recommended clients go strongly overweight duration in June as a good time to extend duration ahead of BoE cuts, with Fed following suit, and we saw the additional duration deliver returns on the bond side of the portfolio before attention shifted to debt supply and the UK budget later in the year, which led us to recommending to move back to neutral.

The importance of portfolio resilience
Our focus on resilience proved vital when it came to navigating the key macro factors in 2024: Growth, Inflation and Interest Rates.
For Growth, anticipating a soft landing for the US economy, we highlighted the potential outperformance of cyclical sectors, and momentum, yield and size factors. In the event, momentum emerged as the best-performing factor, with yield and size also delivering strong returns. For Rates, we adjusted duration exposure mid-year to capture the effect of falling policy rates, aligning portfolios with a changing interest rate environment. For Inflation, which remained above target, the inclusion of liquid real assets (but to a lesser extent than in 2022) and shorter duration inflation-linked bonds, ensured continued portfolio resilience.  We continue to emphasise the importance of a diversified alternatives exposure from a correlation perspective, not just in name.
Our recommendation to consider Private Market Managers and Gold & Precious Metals paid off during the year – as these were the best performing asset classes for the year, outperforming world and US equities.

Political and Geopolitical risks
In a year of elections, we saw a change in government in the UK and in the US following Trump’s Presidential win.  Both have a greater impact on bond yields and currency dynamics than equity markets, in our view.
Geopolitical risks remain elevated with the Russia-Ukraine war continuing to grind, escalating conflict and contagion in the Middle East – all at tragic human cost.

Conclusion
Markets did indeed turn a corner in 2024, with economic growth, earnings and equity market returns outperforming expectations.  With 2024 in the rear-view mirror, it’s time to look ahead to 2025.  Our 2025 outlook is published separately.

Henry Cobbe, CFA
Head of Research, Elston Consulting

Mainstream platforms have been slow to adopt fractional trading.  This has hampered the adoption of ETFs within MPS.  With many more index funds available, it's become less of an issue, according to Henry Cobbe, Head of Research at Elston Consulting.
Read the full article in ETF Stream

ETF Stream interviews up-and-coming fund selectors about breaking into the industry, how experiences have shaped their investment approach and their biggest influences in investing and beyond.

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• Active managers in aggregate underperform the benchmark
• Past performance is not indicative of future performance
• Potential for outperformance declines with time 

For more on this topic
CPD Webinar: Is Active Management a Zero-Sum Game?

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• Regional equity allocation is starting to look dated
• Sectors, factors and themes offer an alternative approach
• These offer greater potential for returns dispersion

For full article, open as pdf

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• Covid restrictions in China have choked off growth
• The government has recently moved to relax regulations
• Chinese equity markets have rallied as a result

In this article for IG, Hoshang Daroga CFA, Investment Director at Elston Consulting, looks at the easing of Covid-19 restrictions in China.
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In this article for IG, Henry Cobbe explores looks at an alternative approach to US indices.
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• Concentration risk is a choice, not an obligation
• An equal weight approach reduces stock and sector biases
• This has proved defensive in 2022 market stress

In this article for IG, Elston's Jackie Qiao explores opportunities in the tech sector.
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• The European coal market has been tight
• Extending or restarting coal-fired plants is quickest fix to supply
• Coal consumption is at record high in 2022

For full article, open as pdf

In this article for IG, Jackie Qiao, Head of Fund Research at Elston Consulting, discusses the value of holding gold in times of market stress.
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In this article for IG, Hoshang Daroga, CFA, Investment Director at Elston Consulting, explores whether and how to add back bond exposure.
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