 [5 min read, read as pdf]
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. Subscribe to our weekly newsletter to get all our insights to your inbox (for UK financial advisers only) 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 
 Markets don't stand still. Should portfolios?
We explore two apparently opposing schools of thought. Read the full article in FT Adviser  [5 min read, open as pdf for full article]
Critics of tracker funds often flagged concentration risk or the “big get bigger” approach of passive investing as a structural flaw to index investing. But concentration risk is a choice, not an obligation for the index investor. As would be expected, an equal weight approach has proved relatively more defensive in the down-market year-to-date. The S&P500 Equal Weight index has returned -5.2% against the traditional S&P 500’s -9.3% YTD, in GBP terms. For more on this topic, please see our CISI-endorsed CPD webinar: The curious power of equal weight, with guest speaker Tim Edwards, Managing Director, Index Investment Strategy, S&P Dow Jones Indices  [Open full article as pdf]
“Suppose we define a passive investor as anyone whose portfolio of U.S. equities is the cap-weight market portfolio described above. Likewise, define an active investor as anyone whose portfolio of U.S. equities is the not the cap-weight market portfolio. It is nevertheless true that the aggregate portfolio of active investors (with each investor's portfolio weighted by that investor's share of the total value of the U.S. equities held by active investors) has to be the market portfolio. Since the aggregate portfolio of all investors (active plus passive) is the market portfolio and the aggregate for all passive investors is the market portfolio, the aggregate for all active investors must be the market portfolio. All this is obvious. It is just the arithmetic of the fact that all U.S. equities are always held by investors. Its implications, however, are often overlooked.” What Bill Sharpe was saying to us was this: the performance of all active managers is, in aggregate [for a given asset class] that of the index less active fees. Which is a considerably worse deal than the charge often levelled against passive funds, namely that investors are paying for the performance of the index less passive fees. CPD Webinar: Is active management a zero-sum game? |
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