The outlook for the rest of 2025 offers an exciting opportunity for active management and alternative equity strategies. As we outlined in the review section of the first half of 2025, the path to the best returns will likely continue to lie outside the concentrated (passive) S&P trade of the last few years.
The charts below show how the consensus trade has raised the level of US concentration in the World Index, rising from 47% in 2010 to 68% in 2025. Within the S&P 500 itself (being a proxy for US concentration), the Magnificent 7 represent 29% of that index, levels barely seen in the last 100 years. With concentration risk, valuation and profit margins all sitting at record high levels over many years, overall equity returns are going to be harder to achieve.
This means that the way to generate acceptable returns will require more creative and thoughtful portfolio creation and stock picking. This might be in a long only context but we believe it will also shine a light again on long/short equity investing that has been sidelined by a combination of easy gains over the last 10 years as well as the rise of private equity as a portfolio diversifier.
Source: Bloomberg, June 2025
Source: BofA US Equity & Quant Strategy, Factset, 31 December 2024
The world today is filled with higher levels of geopolitical risk, led by a US administration that is putting America first and rushing headlong into strategies that support onshoring and the development of its independence in all critical resources from energy to AI.
The reserve currency status of the US dollar has been called into question with some of the highest foreign exchange volume days ever since April’s Liberation Day tariff announcements. From corporates to pension funds, investment teams have been mulling over the rise of economic nationalism and the impact this will have on the US dollar. Investment teams, realising that so much of their risk has been tied up in US dollar longs of various flavours, have moved from a SAA (Strategic Asset Allocation) approach to a total portfolio approach placing more emphasis on the risks inherent in the underlying assets. All of this is music to the ears of highly risk aware active managers. The status quo of the last 10 to 15 years is set to change.
This backdrop requires a much more careful assessment of risk v reward. We believe that risk adjusted returns will be front and centre of investors’ minds running through the second half of the year and this will translate into a demand for strategies that both diversify risk and reduce volatility – again a potential recipe for the resurgence of long/short investing alongside carefully curated funds.
Thematically, we remain positive about the potential for AI to drive significant benefits across all industries and work on identifying winners in the use cases that trump investing in the infrastructure providers which run a risk of running into a capacity glut.
We have waited patiently for the crypto world to unfold, and the IPO of Circle Internet could act as a Chat GPT moment for stablecoins. This will benefit the entire blockchain/crypto supply chain and, together with fintech, remains a key theme for the rest of this year.
Our base case is that equity markets globally remain little changed in the second half of 2025 but the polarisation of winners and losers will remain significant. For the first time in many years, geographical diversification will matter, as will stock selection outside the very biggest companies in the world. In this environment, the overall market returns matter less, but we worry that many investors will remain stranded in the trades that led the last 10 years rather then those that will lead over the next 10, leaving portfolios vulnerable to underperformance. Active equity strategies both long and long/short will play a vital role in cementing return profiles as well as risk mitigation.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
The Funds managed by the Global Equities team:
May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. May have a concentrated portfolio, i.e. hold a limited number of investments or have significant sector or factor exposures. If one of these investments or sectors / factors fall in value this can have a greater impact on the Fund's value than if it held a larger number of investments across a more diversified portfolio. May invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. May invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of a fund over the short term. Certain countries have a higher risk of the imposition of financial and economic sanctions on them which may have a significant economic impact on any company operating, or based, in these countries and their ability to trade as normal. Any such sanctions may cause the value of the investments in the fund to fall significantly and may result in liquidity issues which could prevent the fund from meeting redemptions. May hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay. Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. Do not guarantee a level of income. May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative contracts may help us to control Fund volatility in both up and down markets by hedging against the general market. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
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This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
