In many ways 2024 defied expectations. Monetary policy and geopolitical uncertainty often left investors on the back foot, yet global equities still returned more than 20%. The US once again led the market, but every major region produced a positive return.
Meanwhile, although most of the attraction of bonds now comes from the government portion – rather than the spread – the all-in yield still looks attractive to investors and with further rate cuts on the horizon, investors can hope to lock in some capital gains from the asset class.
But everything in the garden is far from rosy – the global economy is expected to grow in 2025, but at a slower pace than we’ve seen in the previous decade. Figures from the International Monetary Fund’s World Economic Outlook forecast growth of just 3.2% globally and only 1.8% for advanced economies.
There are a lot of factors in the melting pot. Inflation continues to normalise, easing a key concern for policymakers and investors, but progress may slow and may vary across countries – we saw that in the UK recently, with inflation jumping to 2.6% in November.
Various regions have their own specific challenges. Europe’s growth could be dragged down by trade disruptions, while more needs to be done with China’s policy pivot – as it continues to tackle deflation, tariff threats and a declining property sector.
We now have a pro-business president in Donald Trump in the US. He has already started to heavily influence market movements as his tariff policy is formalised. The UK continues to look incredibly cheap, with a tough Autumn Budget doing little to raise the gloom.
The other question is thematics – how far can growth be driven by the big tech behemoths in the market? History says valuations are stretched, but this artificial intelligence (AI) fuelled growth is unlike anything we’ve seen before – often rendering comparisons to the past obsolete. But, as we’ve seen with DeepSeek, it is far from bulletproof
I think a lot of 2025 will be about finding the right balance – there will be opportunities but I’d also expect continued volatility. With this in mind, here are five funds I’d consider for the next 12 months.
Ninety One Diversified Income
Targeting a yield of around 4%, this fund is an ideal building block for a risk-averse investor looking to move their cash into an investment fund. The fund is designed to either replace or complement bonds in an investor’s portfolio. It holds around 200 names, the majority of which are held in fixed income but will also have some equity positions.
Ninety One Diversified Income also uses hedging for downside protection, with the fund targeting half the volatility of UK equities. It has produced strong single-digit returns in nine of the past 10 calendar years (the outlier being a 5% loss in 2022 when markets were hit hard by rate rises). It uses a mixture of growth, defensive and uncorrelated assets to build these smooth returns for investors.
Artemis UK Select
The entire UK market continues to be out of favour, although there are some green shoots of optimism with mergers and acquisitions (M&A) and share buybacks on the rise.
Artemis UK Select fund manager Ed Legget says another way companies are actively working to close the UK valuation gap is by relisting their shares, often in the US, where they can tap into a bigger pool of liquidity and instantly be awarded significantly higher valuation multiples.
Legget says fund flows from overseas will be the big kicker for UK equities to start recovering, believing the political stability brought by Labour’s recent victory in the General Election has already started to bring an upswing in the market from global institutional investors.
Artemis UK Select is a concentrated portfolio of 40-50 stocks of all sizes. The team target individual stocks they believe have non-consensus insight, meaning they will never hold a stock because it is a significant portion of the benchmark. They also have the ability to short positions.
The fund has returned 77.8% over the past five years, versus 22% for the average fund in the IA UK All Companies sector.
Montanaro European Income
This would be an interesting diversifier for those wanting SMID-cap exposure and a reasonable income (currently 3.5%). European SMIDs are now trading on an 11% discount to large-caps (higher than during the 2008 global financial crisis) and the all-time high price-to-book discount of 38%.
Managed by Alex Magni and George Cooke, the team focus on building a well-diversified portfolio of 45 small and mid-cap companies, while also targeting an attractive yield.
Some holdings currently yield as much as 7%, while others are more total return orientated, with yields under 1%. Montanaro European Income is currently operating at a price-to-earnings (P/E) ratio of 16.1x, well below the historical forward P/E of 18.8x, indicating an opportunity should markets start to improve.
Orbis Global Balanced
This fund scours the world for the best investment opportunities across a number of asset classes including equities, fixed income and commodities. Manager Alec Cutler believes one of Orbis Global Balanced’s key advantages is the ability to focus on best ideas and making them “fight for capital”, with every holding needing to be an active contributor to the fund.
The team are big contrarians, building a portfolio of 90-140 positions. The fund is holding a relatively cautious stance at present, with areas such as gold-related securities and US TIPS among the biggest holdings. The fund has returned 75% in the past five years and has produced a positive return in nine of the past 10 years.
Aegon Strategic Bond
I believe flexibility will be essential in the bond market in 2025, particularly if we do see rate cuts pick up. The Aegon Strategic Bond fund has a very broad and flexible remit. It invests globally and is a true strategic bond fund that can change its positioning very quickly when necessary. The managers combine longer-term strategic positions with short-term ideas.
The fund has six sources of alpha generation: asset allocation; credit risk positioning; duration positioning; yield curve positioning; stock selection and sector selection. The fund also yields just shy of 5%.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre. The views expressed above should not be taken as investment advice.