Korea is still an emerging market, or so MSCI reckons. On Tuesday, the most important provider of global indices – the MSCI World and the MSCI Emerging Markets matter much more than the equivalents from FTSE Russell and S&P Dow Jones – once again declined to put it on the watch list for upgrade to developed status.

On one hand, this situation feels increasingly ridiculous. Korea is a very advanced, high-tech economy, home to key tech players such as Samsung Electronics and SK Hynix. GDP per capita measured at purchasing power parity is higher than the UK, France, Japan and many other heavyweights. How can this be an emerging economy in any meaningful sense?

Yet there are aspects to Korea that feel like an emerging market. The ones that MSCI cites are certain limitations that bother institutional investors (restrictions on trading the Korean won offshore is a key one) – although FTSE Russell has classed Korea as developed since 2009, so the importance of these is not cut and dried.

However, perhaps more significant for the long-term future of the Korean stock market is the dominance of large business conglomerates (chaebols), of which the Samsung group is the biggest. The founding families of these groups still control them – often using a series of shareholdings between different listed entities – and frequently make decisions for their own benefit to the disadvantage of minority shareholders.

Generational changes are happening in Korea

Corporate governance is a major reason for the “Korean discount” – the fact that Korean stocks trade at lower valuations than peers elsewhere – but there are signs that this is changing. Policymakers have been pushing reforms, inspired by what governance changes in Japan have done for that market, with some success.

Generational changes also mean a structural shift in attitudes is inevitable, suggested a Korea manager at a recent conference. The individuals who built up chaebols in the 1960s and 1970s put huge importance on passing on control to their heirs as cheaply as possible (Korea has very high inheritance tax). They are now largely dead, the handovers are being completed, and tax bills are being settled. Their heirs will have different priorities that may often be better served by unlocking the full value of their businesses.

So the bull case for Korea sounds easy to make. It does not depend on MSCI one day acceding to the obvious, although being added to the developed index would result in significant inflows from tracker funds. And on the face of it, Korean stocks look very cheap – the MSCI Korea stock market index is on a forecast price/earnings ratio (p/e)of eight.

Yet this reflects the huge weight in Samsung and SK Hynix (65% combined) and how fast they are expected to grow. The MSCI Korea Equal Weight is on a forward p/e of 15, which is not cheap. Most of all, note the market is up by 260% in won terms in a year. If the AI boom continues, it will go higher, but have no illusions. Right now, a Korea stock market tracker is not a valuation play or a reform play – it is entirely an AI play.

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Jeremy Grantham is an expert in stock market bubbles. In the 1980s he spotted the Japanese bubble. He also, rightly, refused to rush into the tech bubble that popped dramatically during the dotcom crash.

Now, with all eyes on the astronomical valuations AI firms are commanding, does he think a bubble is emerging?

In the latest episode of MoneyWeek Talks, Grantham told MoneyWeek editor Andrew Van Sickle that historians a century from now will be writing about this moment in the same way they write about the South Sea Bubble, one of the first and most significant financial crashes in history.

Grantham points to SpaceX. He said: “The SpaceX prospectus is actually unbelievable. Mining asteroids and colonies on Mars and moving through space and a projection of revenue streams, 90% of which seem to relate to AI.

“And it’s not clear that their version of AI, which is at the moment having its bottom kicked around the block by Anthropic and the rest of the boys is going to be even around. Forget 90% of this colossal income stream of the biggest enterprise in the history of man.

“And of course, they’re running at huge losses at the moment. What an act of faith, I mean, give me a break. Talk about tulips.”

That is not to say that Grantham is opposed to the transformative nature of AI, though. He sees that it is impressive. However, he is cautious about the state of the industry at the moment.

He cited the example of the railroad boom, which he sees as a similar crucial technological advancement that hugely boosted productivity. But the market crashed still.

“People don’t realise that the more obvious and important the idea, the more likely you are to attract too much capital and have a market bust.”

“The railroads transformed our lives. They added enormous productivity. And yet they were so obviously going to do that, that everyone built too many railroads, and everyone lost their money. That will happen in AI.”

He added that looking at the history of the Magnificent Seven and comparing it to their future plans shows two different worlds.

“Looking back, you have seven monopolies. Amazon dominates retail sales, Tesla gets a leap ahead in EVs and so on. They each killed off their junior competitors, bought the exciting up-and-coming competitors, and bestrode the world.”

But the future looks drastically different. Instead of seven monopolies, there is one ultimate goal that they are all aiming for – alongside other firms snapping at their heels. That goal is artificial intelligence.

Grantham says the firms believe that whoever gets there first will have a license to make more money than anyone has ever made at anything in history.

“They’re all saying the main risk is not spending enough. ‘We will spend our vast cashflows’, ‘my 200 billion is bigger than your 107 billion’ – it’s like a kind of gorilla fest in that sense and they all pile into the ring to fight to the death.

“There can only be one. They’re going to fight until someone survives. Now, if you think this is like the seven distinct monopolies, you’re crazy.

“This could be the most vicious fight to the end that we have ever seen, starting now. And there are plenty of signs of it already. In that sort of fight, they do not make lots of money and the stocks get crushed. And then they emerge from the wreckage, like the internet.

“The railroads rose from the ashes, and this will rise from the ashes.”

Listen to MoneyWeek Talks for our full interview with Jeremy Grantham. You can watch the podcast on YouTube, or listen to it wherever you get your podcasts.

About the podcast

MoneyWeek Talks is a podcast that helps you unlock the secrets to financial success. Editors Kalpana Fitzpatrick and Andrew van Sickle are joined by influential guests – from CEOs and entrepreneurs to economists and policymakers – to share their top tips on managing money, investing wisely and building wealth.

Subscribe to the MoneyWeek Talks podcast and get ready to make it, keep it and spend it with confidence.

“Are markets just plain wrong to keep looking through the Iran war?” ran the title of the 17 April Merryn Talks Money Bloomberg podcast as markets hit all-time highs. The answer, as was made clear, is almost certainly not. “If you think the market is wrong, it's probably not the market, it's you,” as John Stepek said on the show. Geopolitics famously does not affect markets that much, yet every time there is a disruptive geopolitical event, it is followed by an endless stream of experts claiming that a disaster for investors is inevitable.

Rarely have the experts been as wrong as this time around. From top to bottom in late March, both the S&P 500 and the FTSE 100 fell 9% before bouncing all the way back up again and more in the next three weeks. The pundits predicted the oil price would rise to $150 or $200 a barrel and that there would be a consequent surge in inflation, pushing up interest rates and leading to a recession. This would hit corporate earnings hard and stock markets would spiral downwards. The only safe haven was gold.

Instead, the oil price has struggled to get past $100, gold has fallen about 12% since the start of March, bond yields (except in the UK) have retreated, inflation has ticked only modestly higher and there is no sign of a recession, although interest rates will probably go up, especially in the UK. Anyone who listened to the pundits and took action to “reduce risk” will have lost money. It gets worse. The US market has not stumbled, as confidently expected, but surged ahead, led by the much-maligned “magnificent seven” mega-caps. The AI “bubble” has not burst; it is the potential victims of AI in the software and data-provider sectors that have suffered. Earnings forecasts have continued to rise. The predictions of inevitable disaster were heavily influenced by historic parallels that, on closer inspection, turned out to be false.

The market holds little solace for doomsters

What lessons should be learned for the future? Further disruptive geopolitical crises are inevitable and when they happen, the “end of the world is nigh” crowd will be out in force, hogging the media's attention with their dire warnings of looming disaster and explanations of why markets are being totally complacent. The pessimists are already scanning the horizon for the next crisis to upset markets. With the tide having turned against Russia in Ukraine, that war is unlikely to provide solace for doomsters. If Ukraine's missiles can knock out oil facilities on the Baltic coast, they can surely destroy the Kremlin if Ukraine wishes to. A Chinese invasion of Taiwan has long been predicted by the prophets of doom, but that remains a highly risky venture for a country whose last military adventure, the invasion of Vietnam in support of the Khmer Rouge in Cambodia, was more than 50 years ago and was a disaster. Besides, modern drone technology makes a seaborne invasion even more risky than before.

Doubtless, some new reason to worry about geopolitical events will be found, but the key question is not what such events portend for markets, but what the market reaction tells us about the importance of such events. Nine times out of ten, as with this time, the market's reaction is right and the doomsters are wrong. Still, the parable of the boy who cried “wolf” teaches us that the time may come when those who cry wolf are, at last, right. It is nearly 20 years since stocks suffered a sustained bear market, as opposed to a short-term fall that was soon recovered. The US market is expensive and dependent on a pace of earnings growth that might not be sustainable. The UK and European markets are no longer cheap, just reasonably valued with limited prospects for earnings growth given sluggish or non-existent economic growth. Asian markets have advanced a long way in a short period of time.

“Buy on the sound of cannons, sell on the sound of trumpets,” Nathan Rothschild advised some 200 years ago. For now, taking some profits is starting to look like a better strategy than charging in, but it still looks as though markets will continue to make positive returns in the rest of the year. As US strategist Ed Yardeni reminds us, “earnings growth and economic expansion drive markets, not geopolitical shocks”. Earnings expectations continue to rise, with S&P 500 forecast earnings per share for the next 12 months at $344.30 and expected to reach $380 by year end. That puts the index on a forward multiple of 20.8, falling to 18.8 by year end. For the mid- and small caps, the forward multiple is around 16; for the “magnificent seven”, it is close to 27.

That sounds demanding, but, Yardeni notes, the information-technology sector, up 8% in the year to date, has benefited from a 33% rise in forecast revenue and 55% in forecast earnings in the last 12 months. The semiconductors sub-sector accounts for 42% of the sector, up from 15% a decade ago, and accounts for 47% of expected earnings. With expected earnings soaring, its prospective multiple is actually at a small discount to the S&P 500. Meanwhile, the application-software subsector has seen its multiple more than halve since 2021 to 23.4, the lowest reading since 2014, due to fears that AI will eat into its markets. Despite the $5 trillion valuation of Nvidia, this suggests that the exuberance of last year has given way to a more sober assessment, finding losers as well as winners.

The information-technology sector accounts for 28% of the S&P 500, but three of the magnificent seven, Amazon, Meta and Tesla, are not in it. Including all AI-related shares, technology accounts for 45% of the index and has doubled in three years. Liam Halligan of The Telegraph worries that this is unsustainable, just as the energy share of more than 25% was in 1980 (now 3%), or the more than 60% share of railways was in 1900. That is likely to be true, but doesn't prove that the US market is overvalued; rather, that its sector composition will continue to change over time. Meanwhile, UK and European pundits can only look on in envy; their markets are significantly cheaper, but their dependence on imported energy and their meagre exposure to technology means lower growth in revenue and earnings and a significant valuation discount.

Halligan is on firmer ground pointing out that the cyclically adjusted price/earnings (Cape) ratio for the US market is at an all-time high. This has been an unreliable indicator in the long term, owing to changing accounting rules, rates of corporation tax and its backwards-looking nature. It calculates the ten-year rolling average of corporate earnings in an effort to even out the ups and downs of the economic and earnings cycle. In recessions, earnings drop sharply, bringing down the Cape, so what the current level tells us is that there hasn't been an economic recession for well over ten years, merely short-term dips.

Stay invested, but be wary

No recession is visible, but they never are and when one comes, corporate earnings will fall. In addition, bear markets always expose overoptimistic accounting, weak finances and less than resilient business models. The best protection against this is a moderately valued market providing a cushion against earnings disappointments. A multiple of earnings above 20 and a ten-year US Treasury yield approaching 4.5% do not provide that, so investors are skating on fairly thin ice. Global diversification may not help; other markets may be better value, but have less earnings growth. Emerging markets are performing well, but are heavily dependent on the technology super-stocks of the Far East. If the US market falters, it is hard to imagine other markets carrying on regardless.

There is no need to panic, but investors need to be wary. If markets flatline for the rest of the year, re-establishing value, they can relax about 2027. If they continue upwards, 2027 could bring trouble, even if peace returns to the Middle East and Ukraine, oil prices fall and the political outlook improves.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

At the end of last year, Murray Income Trust (LSE: MUT) announced it had decided to drop Aberdeen as its investment manager and replace it with the team behind the top-performing Artemis Income Fund. The change was desperately needed.

The shares delivered a total return of just 26.9% over the five years to 19 November 2025, putting Murray Income firmly at the bottom of the UK equity income investment trusts sector rankings. Over the same period, the FTSE All-Share index returned 70.9%. Meanwhile, the Artemis Income Fund, managed by Andy Marsh, Nick Shenton and Adrian Frost, has outperformed the UK equity-income fund sector by around 1.70 percentage points per year over the past ten years.

The growth of this fund – which now has assets of around £5.3 billion – has been fundamental to Artemis's success. At the end of the first quarter, the boutique reported approximately £41 billion in assets under management, up from just £28.5 billion at the end of 2024.

Murray Income has now become the second trust mandate that Artemis has won. It also took over the Invesco Perpetual UK Smaller Companies Investment Trust – renamed Artemis UK Future Leaders – in 2025.

Murray Income's new portfolio

The Artemis team officially took over the Murray Income portfolio at the beginning of March. They swiftly restructured all of the trust's holdings to mirror Artemis Income's portfolio.

At the end of 2025, Murray's top-five holdings were AstraZeneca, National Grid, Unilever, RELX and TotalEnergies, which together accounted for 21.6% of the portfolio. These have now been replaced by Tesco, GSK, Lloyds Bank, NatWest and Aviva, which make up a similar 23.6% of the total.

The key difference between the new Artemis approach and the former Aberdeen strategy is a focus on cash flow rather than yield. The team uses free cash flow to assess how much cash a company generates and whether its dividend is sustainable. They concentrate on companies that they believe have the best potential for free cash-flow generation, overall shareholder yield (they like companies that can buy back stock as well) and long-term growth.

Comparing the old and new portfolios illustrates the difference in approach. The new portfolio is trading at a free cash flow yield approximately 50% higher than the old portfolio, based on Morningstar's data.

The top-five holdings in the Artemis portfolio also yield around 1.7 percentage points more on average compared with the Aberdeen portfolio. All in all, the new holdings are cheaper, generate more cash and offer a better overall shareholder yield. That should help the trust maintain its 52-year record of dividend growth, which has earned it “Dividend Hero” status from the Association of Investment Companies (AIC).

The future looks bright for Murray Income

While Marsh, Shenton and Frost are new to Murray, they are not new to income investing. If their record at Artemis Income is anything to go by, the trust has an exciting future.

Investors who already back their existing open-ended fund may want to consider which vehicle is likely to offer the best returns. Recent research from the AIC found that a solid majority (77%) of investment trusts have outperformed open-ended funds run by the same manager over ten years, with average excess returns of 1.3 percentage points per year.

The new managers are already capitalising on a key difference between investment trusts and open-end funds by deploying leverage to enhance returns. The trust has a leverage targeting of 8%-10%, and borrowings stood at by the end of March.

At a 7% discount to net asset value (NAV) and yielding 4.3% (versus its open-ended peer's 3.5%), Murray Income now offers cheap exposure to a sector-leading strategy.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

It is difficult to say who is the most clueless when it comes to the outlook for Britain's public finances. Certainly, one can easily laugh at the Labour MP who told The Times that the bond markets “will have to fall into line” if Manchester mayor Andy Burnham becomes prime minister with a more left-leaning agenda.

Yet the way that bond yields have fluctuated according to the perceived odds that Keir Starmer, Britain's least charismatic, least visionary prime minister in living memory, will cling on in his doomed course for a few more months, suggests that the bond markets themselves are having equal trouble grasping reality.

I am always dismissive of “bond vigilantes” because the truth is that these self-proclaimed upholders of financial law and order have long shown a willingness to fall into line with whatever lunacy prevails.

Where was the bond vigilante revolt when central banks cut interest rates to zero and long-term yields fell to derisory and even negative levels in the 2010s? Who thought that loading up on ten-year bonds in that climate – or 30-year bonds or instruments of pure financial self-harm such as Austria's 100-year bond with a 0.85% coupon – was wise?

Yet bond markets got comfortable with the insanity. If not, central banks would have been the only buyer.

Bond vigilantes are letting the real criminal get away

Of course, a defining trait of bond vigilantes is their tendency to do more harm than good by pointing the finger at the wrong culprit and lynching the innocent. So maybe the label is accurate in a way that isn't intended. After all, while many of the policies preferred by the left of the Labour Party are clearly economically harmful, one cannot with a straight face claim that what Keir Starmer and Rachel Reeves are pursuing will avert eventual disaster. Or – to be non-partisan – deny that the governments that preceded them are equally culpable for where the UK stands.

What Britain needs is a combination of pro-growth, pro-business policies combined with huge investment in the physical and social infrastructure needed to facilitate this and address the growing anger and despair that voters feel. Gilt investors seem averse to any hint of the latter. They appear not to fully appreciate that the consequences of the failing status quo will be much more populist governments that will ramp up spending far more recklessly.

One may argue that an Andy Burnham government implies that the ten-year bond yield should be above 5%. I would agree, not least because today's yields are only high if you view the central-banking malfeasance of the 2010s as normal (see chart below). Yet three more years of Starmer (or similar) merits an even higher yield due to the rising probability of even worse outcomes. Fixating solely on “fiscal restraint” is very short-term thinking – not wildly different from buying a century bond to pick up a smidgin of extra yield for a few years.

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Selling (or “writing”) options on a portfolio to generate income has become more popular over the past two decades. The strategy took off in the zero-interest-rate era following the global financial crisis and got another boost when central banks took interest rates below zero again in the pandemic.

Investors collect a premium when they write call options on their existing shareholdings (known as “covered calls”). The logic is simple: you can earn ongoing income from a stock you already own if it doesn't pay a dividend and pick up an extra bonus even if it does. However, trading options is a complex business and can be costly if you don't know what you're doing. So there have been many attempts to create products that let individual investors use this strategy in a simpler way. These include premium-income ETFs – exchange-traded funds that hold a portfolio of stocks, write options on them and (typically) pay monthly distributions from the proceeds.

Premium-income ETFs have begun to hit the mainstream in the UK. The JPMorgan Global Equity Premium Income Active ETF (LSE: JEGP) and the JPMorgan Nasdaq Equity Premium Income Active ETF (LSE: JEQP) have over £1 billion and £2 billion in assets, respectively, while the Global X Nasdaq 100 Covered Call ETF (LSE: QYLP) has amassed around £0.5 billion.

There is also a fast-growing range of smaller products. In total, European investors have access to 57 such ETFs, according to ETF data provider ETFGI. Assets under management stood at $5.6 billion at the end of March after year-to-date inflows of nearly $1 billion.

A different approach with premium-income ETFs

Trailing yields on the most popular premium-income ETFs range from 7.7% for the JPMorgan US Equity Premium Income Active ETF (LSE: JEIP) to 11.5% for QYLP. This is much higher than the yield on a typical high-yield ETF and reflects a very different strategy.

“Option-income ETFs generate income through writing call options on stocks they hold as well as the dividend income, which is usually much lower than the options income,” notes Tom Bailey of HANetf, the ETF platform that issues the YieldMax and Rex covered-call ETFs. So while a dividend-income fund can only own stocks that meet certain yield criteria, a premium-income ETF selects stocks on their potential to earn high options premiums.

The need for liquid options markets pushes these premium-income ETFs into larger and more liquid equities, but usually different ones from a typical income fund. “Highyield ETFs often hold energy, utilities, consumer staples and other reliable dividend payers. Premium-income ETFs, by contrast, will often hold technology stocks,” says Bailey. This can provide investors with a degree of diversification in their income portfolios that they may otherwise have rejected due to a lack of dividend yield.

Premium-income ETFs aren't a replacement for income funds

Investors shouldn't view premium-income ETFs as a simple replacement for income funds. Dividend stocks tend to be less volatile than other equities, which translates into lower volatility for your portfolio value. Tech stocks are far more volatile, so while they may help the fund generate more income, that will come at the expense of bigger swings in the portfolio.

What's more, selling call options on the underlying asset means that premium-income ETFs cap equity upside (if a stock goes up a lot, the option buyer will exercise their right to buy the stock from you). So investors are trading off a few percentage points of long-term capital gains every year for immediate income returns.

Note, too, that income is not guaranteed. Options prices are volatile and depend on multiple factors: premiums and income generated will spike in periods of volatility and fall when markets are calm. For example, YieldMax Big Tech Option Income ETF (LSE: YMAP) is on a trailing yield of 27%, but that depends on high volatility in tech. Managers can sell more options to enhance the income, but that would increase leverage and risk. However, despite these drawbacks, there's clearly a growing market for these funds.

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Danaher (NYSE: DHR) has generated investment returns of around 200,000% over the last 40 years, outpacing the broader stock market by several multiples. The firm remains less famous than the major technology giants, but its record of creating value for shareholders ranks among the best in the world. Since its move into manufacturing in 1984, the firm has turned a small sum into a fortune by mastering a disciplined system of buying and improving companies.

This firm shows how a steady focus on process can change even the most unpromising assets into a strong competitive advantage. It moved from its early days as a failing property firm to its current status as a leading healthcare-equipment provider when the founders shifted from corporate raiding to a more patient model of long-term compounding. To understand the current success of this business, one must first look back at the lessons learned during its high-stakes beginnings.

Danaher began as DMG, a real-estate investment trust that by the early 1980s had fallen on hard times. In 1984, two ambitious young brothers, Mitchell and Steven Rales, bought and repurposed the entity as a vehicle for aggressive dealmaking. The brothers used high-yield debt and the trust's accumulated tax losses to buy unloved industrial companies and shield profits from the taxman. At this stage, the company operated as little more than a machine designed to make a fast return on borrowed money. In 1985, the strategy changed after a failed bid for the Scott Fetzer Company. This attempt at a hostile acquisition turned into a public clash between two different styles of investing. The Rales brothers offered a significant sum, but the owners preferred a lower, friendly offer from Warren Buffett – the legendary CEO of Berkshire Hathaway. They chose the lower offer because they preferred his plan for the company over the aggressive tactics of the Rales. It was like a homeowner choosing a buyer who plans to raise a family in their beloved house rather than an investor who intends to turn it into a block of flats.

Danaher's lessons from Warren Buffett

This unsuccessful bid taught the brothers that hostility and excessive debt often destroyed the very value they wanted to capture. This loss prompted a new way of thinking and they began to pursue businesses with a durable competitive advantage that they could hold for decades. This shift occurred during a fishing trip that the Rales brothers took at Danaher Creek in Montana. The name change to that of the river reflected a move away from asset-stripping. The business began to pivot from being a collection of random businesses into a conglomerate of niche plays. By targeting companies with dominant positions in small markets, Danaher applied a consistent system to drive growth over many years. It remained important to secure attractive deals, but the emphasis shifted away from financing concerns towards expanding profit margins and strengthening the competitive positions of newly acquired businesses.

By 1990, the brothers completed the transition of Danaher into a professional investment machine. Mitchell and Steven Rales stepped back from executive roles to become board members, acting as stewards of the company rather than its daily managers. By hiring professional leaders to run operations, the founders focused entirely on the broader investment strategy. This enabled Danaher to evolve into a platform designed to acquire high-quality businesses and manage them with care. The strategy was set, but the company required a rigorous process to ensure these new acquisitions improved after the purchase.

Danaher solved this operational challenge through the Danaher Business System, or DBS. This framework serves as the organisation's central guiding operating system. In the late 1980s, the leadership looked to Japan to understand why Toyota outperformed American car companies. They discovered the concept of kaizen, or continuous improvement. Ironically, Japanese corporations had adopted American business styles in developing kaizen, so, in a sense, Danaher was merely repatriating US ideals. While other Western firms viewed this as a tool for the factory floor, Danaher's bosses adopted it as a universal management philosophy. They applied the concept to every corner of the business, from factories to the head office.

The system rests on four central pillars: people, plan, process and performance. This framework mandates a culture where associates spend most of their time on execution rather than on analysing results. This approach prevents the common corporate trap of “analysis paralysis”. One important component is hoshin kanri, or “compass management”. This ensures every part of the business points toward the same goal. It aligns the board's strategy with the daily tasks of every employee to ensure everyone pulls in the same direction.

DBS operates as an underpinning philosophy embedded in the way that every unit runs, rather than simply a manual or a newsletter that people might ignore. Even the board members regularly spend entire weeks leading kaizen events on factory floors to identify and eliminate waste. By focusing on the place where the work happens, known in Japanese as gemba, the firm stays grounded in reality. This commitment to process ensures that every acquisition quickly improves to generate superior margins and predictable growth. This internal engine has allowed the business to transition between industries without losing its competitive edge.

Danaher has moved from purely industrial businesses towards areas with long-term competitive advantages, specifically life sciences and diagnostics. The business operates a “picks-and-shovels” model, choosing the firms that provide the essential tools for research rather than taking the risks associated with drug development. If a pharmaceutical company fails to bring a new cure to market, they can lose everything. Danaher sells the filters and resins that laboratories need regardless of which specific drug wins approval. This creates a steady revenue stream tied to the broader growth of global healthcare.

The biotechnology branch drives much of the growth. Through its brands Cytiva and Pall, the firm dominates the production of monoclonal antibodies. These complex medicines treat diseases such as cancer and migraines, and were vital during the pandemic. They also feature in everyday laboratory testing, most notably in pregnancy tests. The equipment is specified into the drug manufacturing process itself. Once a medicine wins regulatory approval, the specific filters and components used to produce it are locked in. Switching to a rival supplier would require a long and costly review of the entire factory process. The diagnostics division offers a similar edge. This creates a high degree of certainty for future sales. It moves the business away from the unpredictable cycles of heavy industry towards a more reliable stream of income and this focus on non-discretionary health trends has lowered the long-term risk profile of the business.

A professional acquisition machine

Danaher functions as a professional acquisition machine, which avoids buying businesses simply for the sake of growth. Instead, it follows a rigorous plan to identify markets where it can create a sustainable competitive advantage. These acquisitions fall into two main categories: platforms representing foundational entries into vast new industries that serve as a base for future expansion; and bolt-ons, or smaller firms designed to fill specific technical gaps. The group merges these smaller companies into existing divisions to remove overheads and share technology.

A high level of discipline dictates the price paid for these assets. Every potential deal is measured against a strict financial goal, where the business must produce a 10% return on invested capital by its fifth year. Management specifically looks for businesses with high gross margins, but low operating profits. A high gross margin suggests the product is vital to the customer. A low profit margin suggests the business is being run inefficiently. This gap represents the opportunity for improvement. By applying the Danaher Business System, the firm often doubles the margins of a new arrival within three to five years.

The DBS Office manages this transformation. This team of internal specialists helps new staff adopt the company culture. This requires employees to spend 70% of their time defining a problem and only 30% on the solution. This ensures the team fixes the root cause of an issue rather than just the symptoms. This explains the success rate, which far exceeds the industry average.

The business has faced setbacks during its growth. The acquisition of Cepheid, which became famous for producing rapid Covid tests, succeeded by scaling a niche provider into a global leader in diagnostics. However, other areas proved more difficult. The bioprocessing inventory glut of 2023 and 2024 presented a recent challenge. During the pandemic, customers over-ordered supplies to avoid shortages. This led to lower sales in the post-pandemic world as those stocks were used up. The firm was caught off-guard by the speed of this shift, leading to frustration among some investors.

Learning from mistakes made internally has also shaped the company. In the past, subsidiary managers made mistakes by focusing too much on specific tools of improvement while losing sight of the broader strategy. These managers would lead kaizen events to fix minor floor issues without ensuring they aligned with the long-term plan. This led the parent organisation to refine its “strategic compass” to ensure every change serves a clear purpose. These challenges forced Danaher to become more transparent and to improve its forecasting to prevent a repeat of such supply-chain shocks.

The firm is currently positioning itself at the frontier of genomic medicine. By using a platform approach, the group aims to standardise the way new cures are made. This is often compared to a burrito, where the outer wrap remains the same while the filling changes. This method could significantly lower the time and cost of treating rare diseases. By integrating artificial intelligence, the firm is creating a digital backbone for the industry. Furthermore, the acquisition of Masimo, a leader in pulse oximetry, allows the firm to capture vital data directly from the patient at the hospital bedside.

Danaher is a much larger organisation today than it was in its industrial beginnings, suggesting that a repeat of the 200,000% return over the next 40 years is improbable. Nevertheless, it remains one of the best businesses in the world at identifying, buying and managing assets. Its unique culture and the rigorous application of its business system set it apart. The astronomical gains of the past may be behind it, but the firm remains an excellent choice for those seeking a high-quality investment.

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At Janus Henderson's North American Income Trust (NAIT) we focus on US income stocks – quality franchises that consistently generate cash and have disciplined capital-allocation policies focused on investment in the business to sustain competitive advantage while paying a progressive, covered dividend. Surplus cash beyond this may be used for bolt-on mergers and acquisitions, or to repurchase shares when the stock is dislocated from long-term assessments of fair value. The NAIT has a strong record of paying a progressive dividend and growing revenue reserves since the fund's inception in 2012 (it was converted from the Edinburgh Tracker Trust). The average dividend in the portfolio is 3% and dividend growth averages an attractive 6%-7%.

Our revenue reserves can comfortably cover one year of payouts and may be used if needed. However, there was only one small dividend cut during the 2020 pandemic period and none since then. Many UK investors may not automatically think of US income stocks, but there are several that offer attractive and growing dividends. The US has a history of superior earnings growth, which can often translate into higher dividend growth, too.

How to gain exposure to US income stocks

Dell (NYSE: DELL) is a technology infrastructure company uniquely positioned to grab a slice of the next wave of corporate spending on AI applications. Its scale, global supply chain and deep relationships with customers from the private and public sectors make it a preferred supplier of AI servers and data-storage technology. As enterprises move from experimentation to deployment, Dell will benefit from recurring technology update cycles. Growing profitability is supported by the company's shift toward higher-value technology infrastructure and its disciplined cost management. Debt has been cut and capital returns support the yield. We believe Dell's valuation fails fully to reflect the durability of demand and the firm's exposure to capital expenditure on AI.

Johnson & Johnson (NYSE: JNJ) is another US income stock that offers a rare combination of earnings quality and durable growth. Following the spin-off of its consumer-health division in 2023, it is a focused, innovation-driven pharmaceutical company and a leader in medical technology that should comfortably deliver mid-single-digit revenue growth. It has a diversified drug pipeline, which reduces risk, and its franchises in oncology, immunology and cardiovascular treatments are best-in-class, which will support cash flows in the long term. The medical-technology sector is growing strongly and the worst seems to be behind the company when it comes to legal issues. This is restoring investors' confidence and valuations. With a strong balance sheet, consistent free cash flow and a long record of dividend growth, Johnson & Johnson remains a core holding in volatile markets.

Morgan Stanley (NYSE: MS) is a global leader in the capital markets. Its earnings have become more resilient following a strategic pivot toward wealth and investment management, which generates stable, fee-based revenues. These annuity-like income streams provide downside protection while preserving upside exposure to appreciation in the markets and net asset inflows. The firm's strong capital position is enabling it to buy back shares and grow dividends. We believe Morgan Stanley's improved position will deliver impressive gains tied to long-term growth in the financial markets.

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Hedge funds that focus on picking stocks have had a fantastic start to the year. So-called long-short equity hedge funds returned around 6.7% for the year to 14 April, before the rally in equity markets that took place on news of the ceasefire in the Middle East, according to a report compiled by Goldman Sachs. The MSCI World index gained 4.3% for and the S&P 500 3.9%.

Long-short equity hedge funds try to beat the market by taking long positions in their favourite firms and going short or betting against the companies they believe are overvalued. This is just one part of the $5.2 trillion hedge-fund sector. Because they are aimed at high-net-worth and professional investors, hedge funds can invest wherever they want and in whatever they wish to, as long as they have their investors' permission. The Andurand Commodities Discretionary Enhanced fund, for example, an energy-focused hedge fund managed by legendary oil trader Pierre Andurand, returned 31% in the first quarter of 2026, driven by bullish bets on oil markets (although it went on to lose 51% in April). Another fund, Point72 Asset Management, is what is known as a “multi-strategy” hedge fund, and trades everything from oil to interest rates, currencies and equities to earn a return. It ended March up nearly 4% despite the volatility in global markets.

The global hedge-fund industry attracted $89.3 billion in new capital over the six months to the end of March, the highest two-quarter period of inflows since 2007. “Macro” funds have been particularly popular with investors, according to the latest HFR Global Hedge Fund Industry report. These funds seek to profit from movements in financial markets driven by political or economic events and invest across all asset classes, using leverage to boost returns. Major macro firms include Bridgewater Associates, Brevan Howard, Caxton Associates and Rokos. HFR's benchmark index for these funds, the HFRI Macro (Total), returned 4.9% in the first quarter, outperforming the MSCI World index by 8.5%. Meanwhile, HFRI's fixed-income index, the HFRI Relative Value (Total), added 1.4% in the quarter, around 2.6% better than the -1.2% return for the BofA Global Broad Market Corporate bond index and 3.3% more than a broad index of UK gilts.

Hedge funds are not as exotic as they look

These returns illustrate the key reason to hold hedge funds in a portfolio: they can help fund managers and investors to reduce volatility by gaining exposure to assets they may not have the expertise or resources to trade themselves. However, most hedge funds require a minimum investment of around £100,000. Some won't talk to you unless you're willing to put up millions. What's more, to make the most of these vehicles investors tend to hold a portfolio of funds, each with a different focus. So, adequately to take advantage of the sector, investors need several million pounds. That's why the hedge funds tend to be off-limits to all but the wealthiest individual investors.

That said, UK investors do have some options. There are a number of hedge fund structured as investment trusts, as well as one publicly listed hedge fund based in London and traded on the London Stock Exchange.

In our globally interconnected financial markets, there are also options on other exchanges around the world that could be worth considering for those seeking to diversify their portfolios.

Hedge funds are often portrayed as exotic and complex, but in reality, they are very similar to the funds available to the average retail investor. A hedge fund is simply a fund formed by a group of private investors with the aim of generating a return on their investment over a set period. They often seek to achieve a positive absolute return, rather than outperform a benchmark – that is, they seek to achieve a positive return regardless of whether the broader market is rising or falling.

However, because hedge funds tend to focus on high-net-worth investors and institutions (such as pension funds), the regulations governing them are much more flexible. It's assumed that the institutions and wealthy individuals who decide to invest in hedge funds have the skills to evaluate the proposition themselves, so hedge-fund managers have much more flexibility around where they can invest and how they can invest.

There's also no obligation for hedge-fund managers to report what they hold and why they hold it. Some managers may decide to own just a handful of different assets and update investors once a year. Others may hold thousands of different investments, with teams of traders buying and selling positions every minute. Hedge funds also tend to have higher fees than the active funds available to the mass market. It's common for managers to adopt a “two and 20” structure, with a management fee of 2% a year and a performance fee of 20% of any profit, although managers will offer better terms for more important customers. While the additional fees do undoubtedly have an impact on returns over time, it ensures the managers, who often own a big stake in the fund themselves, have a strong incentive to achieve the best returns, and this level of incentive structure is something you don't usually see with active funds aimed at the mass market.

Hedge funds also frequently restrict their investors from withdrawing money. This can be helpful when using esoteric or illiquid investment strategies and managers don't want to have to deal with a large number of redemption requests in any particular period, which may force them to sell assets at a bad time. In this respect, hedge funds have a lot in common with investment trusts. Investment trusts have a fixed capital base; hedge funds can lock in their capital for a period. Some funds will require investors to commit for five years when they make an initial investment. Others may require them to submit redemption requests quarterly rather than daily. They also often reserve the right to “gate” withdrawals, or prevent investors from accessing their cash if the manager believes doing so would have a detrimental impact on investment returns.

Just like investment trusts, hedge funds can and do use leverage, or borrowed money, to enhance returns. However, this has led to disastrous outcomes in the past, when managers have borrowed too much, too quickly. One of the most notable recent examples was Bill Hwang's Archegos Capital, which imploded after borrowing $160 billion against just $20 billion in capital. The funds collapse wiped out Hwang's $20bn net worth overnight and ultimately led to the collapse of global investment bank Credit Suisse. In another example, in the first quarter of 2021, Melvin Capital, run by Gabe Plotkin, lost about $4.5 billion, or 49% of its assets, in a few weeks, betting against GameStop using borrowed funds. The fund survived only after receiving a $2.5 billion bailout, although it closed for good a year later.

Hedge fund managers are only human

Hedge funds have attracted plenty of criticism over the years, mainly on the issue of fees. A study published in February 2020, “A Bias-Free Assessment Of The Hedge Fund Industry”, found that between 2013 and 2019 hedge-fund managers created up to $600 billion in value added, before fees. Net of fees, the figure was significantly lower. In fact, one study of 22 years' worth of hedge fund data, also published in 2020 (“The Performance Of Hedge Fund Performance Fees”), found that fees consumed 64% of the gross returns on investors' capital over the long run.

Hedge-fund managers would, of course, argue that they deserve higher fees because they outperform the market. And that is true to a certain extent. But they are also only human. Another study published in May 2011, “Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn”, found that although a hedge-fund portfolio's buy-and-hold return between 1980 and 2008 came in at 12.6%, higher than the S&P 500's total return of 10.9% over the same period, the dollar-weighted annual return, accounting for investors' inflows and outflows, was just 6% a year. This shows that, although most hedge-fund investors are far richer than the average investor, they're still subject to psychological biases. Indeed, Morningstar's latest Mind the Gap report revealed that the average investor lost 1.2 percentage points annually over the past decade due to poor timing of purchases and sales. Multiple studies have reached the same conclusion.

Focusing on this performance in isolation misses the point, however. Hedge funds and alternative strategies should only be used as part of a portfolio to provide diversification and help smooth long-term returns. Hedge fund Universa Investments is one of the best examples of what a hedge fund or alternative strategy can provide. Universa specialises in risk mitigation against “black swan” events – that is, unpredictable and high-impact drivers of market volatility. To this end, it employs a bespoke combination of credit-default swaps (a form of credit insurance on corporate debt), stock options and other derivatives to bet on market movements. The fund is highly secretive, but Universa reportedly manages $20 billion and posted a 100% return on capital when Donald Trump unveiled his sweeping tariffs last April. It reportedly earned 4,000% in March 2020 when the pandemic broke out.

Universa is far from the only fund that has used this approach to make enormous profits. Bill Ackman's Pershing Square hedge fund earned $2.6 billion during the pandemic after paying $26 million to acquire a portfolio of credit-default swaps, which then soared in value by more than 10,000%. These trades don't come around very often, which is why it can pay to have a manager focused on finding opportunities.

Wealthy individuals and companies that invest in hedge funds will do so as part of a broadly diversified portfolio. This helps reduce the risk of volatility, erosion of returns by fees and any individual hedge-fund blow-up. Insurers typically allocate between 3% and 10% of their funds to hedge funds and other alternative assets, while public pension funds allocate up to 12% on average, according to figures compiled by Goldman Sachs and the French bank BNP Paribas. University endowments can take larger positions, primarily because they have a much longer-term focus.

Endowments allocate 15%-40% of their assets on average to long-short, event-driven and emerging-market hedge funds. Family offices, which can also take a longer-term view, also tend to have a higher allocation, although typically capped at around 25% on average, according to research.

One of the world's most active hedge-fund investors is the Canada Pension Plan Investment Board (CPPIB). This $714 billion fund has been investing in and backing new hedge-fund managers for years and it's accumulated a $76 billion portfolio of internally and externally managed funds. According to the fund's 2025 annual report, its strategies have delivered $15.6 billion above its benchmark in net added value over the past five years, mainly due to external fund allocations.

Hedge funds for the average investor to buy

While most hedge funds are off-limits to the average investor, the UK is actually uniquely positioned in having a number of publicly traded hedge funds available for individuals to buy and sell on the London Stock Exchange. Two of these are in the FTSE 100: Pershing Square Holdings (LSE: PSH), and the world's largest publicly traded hedge fund, Man Group (LSE: EMG).

Pershing Square was listed in London in 2017 and is run by Pershing Square Capital Management, founded in 2004 by Bill Ackman. It's not an exact copy of the parent firm's fund, but rather a selection of the best ideas. The fund aims to hold eight to 12 core holdings (although a total of 15 holdings are currently listed), bundled up within an investment-trust structure. That means it's available to smaller investors and has the added benefit of an independent board of directors that provides oversight and ensures their representation. The trust has a typical hedge-fund fee structure, with an annual management fee of 1.5% and a performance fee of 16%. Management would argue that the returns have more than justified the high fees. Since its inception in 2012, the fund has produced an annualised return in terms of net asset value of 11.8% compared with 6.5% for the FTSE 100 in US dollar terms. Holdings currently include Uber, Amazon, Google and Meta.

Man Group runs a range of investment products operating under a variety of investment strategies. Its main options come under its computer-driven trading arm AHL, and they've performed particularly well this year. In the three months to the end of March, its AHL Alpha fund added 5.7% and AHL Dimension returned 5.6%. Man Strategies 1783 notched up a 3.8% return. Thanks to this positive performance in a quarter defined by volatility, assets reached $228.7 billion in the three months through March, up from $227.6 billion at the end of 2025. Buying shares in Man Group won't give investors direct access to its underlying strategies, but will provide exposure to the firm's income stream. For the year to 24 April, shares in the hedge fund returned 11.6% and over the past five years produced a total annualised return of 13.8%.

Another London-based option for investors is BH Macro (LSE: BHMG). This investment trust has just one investment: units of the Brevan Howard Master Fund, one of the world's largest and most successful macro hedge funds. This trust is designed to provide investors with a strategy to diversify away from equity markets. Since the first half of 2007, there have been 20 significant market drawdowns where the US S&P 500 index has fallen by 5% or more. In 17 of these 20 periods, BH Macro's net asset value actually increased. In October 2008, for example, when the S&P 500 fell by more than 15%, the fund's net asset value rose by several percentage points. The fund, with its 150 portfolio managers and traders, has achieved an annualised return of 8.5% since inception, with less volatility than in broader equity markets.

Another option is Tetragon Financial (LSE: TFGS). This trust owns a portfolio of private businesses, hedge funds, credit, real estate and bank loans. Its net asset value has risen 612% since its inception in early 2007, nearly double the MSCI All Country World index. It charges a performance fee of 25% and an annual management fee of 1.5%.

Blackstone (NYSE: BX) is one of the world's largest publicly traded asset managers. It was founded in 1985 and started life as a private equity and mergers and acquisitions shop and has since expanded into real estate, private credit, fund management and even hedge funds. The $1 trillion asset manager is leading the charge in bringing hedge funds to high-net-worth individuals with the Blackstone Multi-Strategy Hedge Fund, known as BXHF, which plans to start trading this year. According to Bloomberg, the fund will invest about 30% of its assets in other hedge funds as well as make its own investments. It will charge a 1.25% management fee and take a cut of 12.5% of profits once it earns at least a 5% return. Blackstone could be one of the best ways to invest in the booming market for alternative assets, offering diversification across multiple sectors.

There are limited options for investing directly in hedge funds and hedge-fund managers, but investors can use a selection of investment trusts to build exposure to alternative assets and diversify their portfolio themselves. For example, BioPharma Credit (LSE: BPCR), an offshoot of Pharmakon Advisors, one of the world's largest specialist biotechnology funds, lends directly to biotechnology companies and yields 7.5%. The trust has a near-spotless lending record.

Elsewhere, the TwentyFour Income Fund (LSE: TFIF) and TwentyFour Select Monthly Income (LSE: SMIF) focus on trading collateralised loan obligations and mortgage-backed securities to generate a high single-digit annual dividend for investors. These funds are highly specialised vehicles, but can help diversify portfolios.

On the credit side, there's also CVC Income and Growth (LSE: CVCG). This investment trust is managed by the private-equity giant CVC and holds a portfolio of senior secured loans acquired for yield and value. Once again, the trust could provide investors with diversification during turbulent times.

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“It's a market of stocks, not a stock market” is an old cliché, intended to remind us why investing is ultimately about how well individual companies are doing from the bottom up and not a top-down view of the FTSE 100 or S&P 500.

I don't entirely agree with this thinking, at least in the modern world. The growth of index investing has meant that many people now invest in the whole market or in broad sectors and don't care about the companies they hold. Money flowing in and out of funds can do more to determine whether valuations rise or fall than real changes in a business's fundamentals.

Still, it is always important not to let big-picture fears blind us to how well individual stocks are doing. If most companies are seeing robust earnings growth from the bottom up, it is likely that the overall index will keep going up. And right now, the reality is that earnings growth remains very strong in the US.

The year-over-year blended growth rate (ie, including both results reported so far and latest estimates) for the S&P 500 is currently 15.1%, according to FactSet – the sixth successive double-digit quarter. The index is expensive: at just over 7,100, it's on a trailing price/earnings ratio of 28. Yet if earnings keep compounding like that, it's not really a stretch to stay bullish.

The greatest threat to earnings growth

In the medium term (maybe three to five years), one has to wonder whether giant companies can continue to earn such high margins: the S&P 500 net margin is once again setting a new record of 13.4%. The geopolitical and political trends that let businesses – especially multinationals – become ever more profitable over several decades are shifting. Maybe this goes into reverse. But a few years is a lifetime in the markets and we are obviously not there yet.

In the shorter term (maybe a year or two), the extent to which AI mania is underpinning this boom cannot be ignored. In the tech sector, earnings growth is at 46%. There is a very fine line to be walked here: if all this investment does not bring huge productivity gains, it will grind to a halt. If it puts too many people out of stable employment, the political backlash could be equally dangerous. Yet all investors care about is what will happen in the next couple of quarters, and there is no sign of the boom letting up so far.

So what is the greatest ultra-short-term threat? Energy. The amount of oil at sea when the Middle East crisis started means that the consequences of the closure of the Strait of Hormuz and the shutting in of millions of barrels a day of crude is not really translating into shortages yet. Even if supplies resume tomorrow, there will be a lag and the effects will still show up over the next couple of months. But if they do not resume soon, the crunch is going to become very evident. A market focused on historic earnings and understandably upbeat forecasts is not pricing that in.

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Shell, BP, HSBC, AstraZeneca, British American Tobacco – nobody's idea of an exciting portfolio.

Yet a study of every UK-listed stock over the past 50 years found that the top ten wealth creators, including these five, captured nearly a third of all the real wealth generated by UK stocks. Thousands of listings came and went in that time. These stayed and compounded, and also sometimes feature in the most popular stocks purchased by DIY investors.

This makes the current anxiety about market concentration worth examining. The Magnificent 7 now account for 39% of the S&P 500. Passive fund assets have passed 50% of all US equity fund assets for the first time.

In his January 2026 shareholder letter, Terry Smith warned that the shift into index funds is 'laying the foundations of a major investment disaster', though he conceded he couldn't say when or how it would end.

It's an argument that resonates. When seven stocks dominate a major index, something feels uncomfortable. But three recent studies, covering UK and US equities over periods from 50 years to nearly a century, tell a different story. Wealth creation has always been concentrated in a tiny minority of companies. The question isn't whether your index is top-heavy. It's whether the alternative gives you better odds.

And on that, the evidence is striking.

Which UK stocks created the most wealth?

Only three per cent of UK stocks created all the wealth. A newly published, peer-reviewed study in the Journal of Asset Management quantifies what many investors suspect but few grasp in full. Jonathan Fletcher and Michael O'Connell at the University of Strathclyde examined every stock listed on the London Stock Exchange, the Unlisted Securities Market and AIM between 1975 and 2024. Their finding: just 3.1% of those companies generated all of the market's aggregate net wealth creation in real terms.

The names that did the heavy lifting won't surprise anyone. Shell, BP, HSBC, British American Tobacco, AstraZeneca, Rio Tinto, GlaxoSmithKline and Unilever – dull yet dependable.

The top 10 alone captured nearly a third of all aggregate wealth created. These weren't the stocks that made headlines; they were the ones that compounded quietly while the headline stocks came and went.

More than half of all UK stocks failed to beat Treasury Bills over their lifetimes. The median stock lost money after inflation: a lifetime real return of −13.9%. AIM, the market segment most associated with exciting growth stories and tax-efficient wrappers, produced negative aggregate net wealth of −£2.6 billion.

This isn't a UK anomaly. Hendrik Bessembinder at Arizona State University, whose 2018 study first documented the pattern in the US, has updated his data through 2022. Across nearly a century of American equities, just 4% of stocks accounted for all $55 trillion of net shareholder wealth creation. The remaining 96% collectively matched Treasury Bills at best.

Two different markets. Two different time periods. The same conclusion: equity wealth creation has always been radically concentrated. The few carry the many.

So when only 3% of stocks generate all the aggregate wealth, today's top-heavy indices aren't a distortion. They reflect how markets work. And if you're picking individual stocks, you're betting you can identify those winners before the fact, from a pool where the median outcome is a loss.

Avoiding market concentration actually made things worse

If concentration is structural, what happens when you try to fight it? Mark Kritzman of Windham Capital Management and MIT Sloan and David Turkington of State Street Associates set out to answer that in their recent paper - The Fallacy of Concentration.

They built a dynamic strategy that reduced equity exposure whenever market concentration was historically high and increased it when concentration fell. The result: lower returns, higher risk and less than half the cumulative wealth of staying invested.

The buy-and-hold investor earned a Sharpe ratio of 0.52. The concentration-avoider earned 0.39. Both held the same average equity exposure over the full period, at 67.8 per cent. The difference wasn't about courage or conviction. It was about fighting a feature of the market that turns out not to be a bug.

Large companies aren't just large. They're structurally less volatile. Kritzman and Turkington found that the biggest decile of S&P 500 stocks had annualised volatility of 19.2 per cent, compared with 28.8 per cent for the smallest. A market dominated by large companies is, counterintuitively, a calmer one.

Smith is not wrong that passive flows direct money mechanically toward the biggest stocks. That's how cap-weighted indexing works. But whether that mechanism exists matters less than whether the concentrated index is more dangerous than the concentrated stock-picking portfolio. On that, the evidence is clear.

Buy the whole book

The Fletcher and O'Connell data leaves stock pickers with an uncomfortable question. If the vast majority of listed companies destroy value over their lifetimes, picking individual stocks looks less like a skill contest and more like a raffle. The rational response isn't to study the tickets harder. It's to buy the whole book.

Terry Smith, of course, would disagree. But his own record is instructive. Fundsmith returned 0.8% in 2025 against 12.8% for the MSCI World - Smith’s fifth consecutive year of underperformance.

Laith Khalaf, head of investment analysis at AJ Bell, noted that the fund has now lagged its benchmark over both five and 10 years.

Khalaf's wider point is worth hearing too: “Fundsmith's earlier outperformance was partly flattered by the low interest rate environment that suited Smith's quality style. Now that tailwind has reversed, the structural headwinds facing stock pickers are harder to ignore.”

None of that reflects on Smith's intelligence or his process. It reflects the odds, and those odds don't bend for reputation.

Market concentration is worth understanding. It's worth watching. But the evidence from three studies spanning two markets and close to a century of data points the same way: the risk most investors should worry about isn't a top-heavy index. It's a portfolio that bets against the 3 per cent carrying everything else.

For most of us, the better odds are hiding in plain sight.

Another week brings another wild ride in the Middle East. Markets are still taking the swings far more calmly than almost anybody would have expected a few weeks ago. There's more volatility below the headlines when you look at which sectors are doing well or poorly, but the fact that global stocks are broadly unchanged since America and Israel first attacked Iran seems increasingly hard to understand.

One possibility is that investors remain optimistic that the crisis will pass and everything will go back to the way it was before. That is plausible, but becomes less likely the longer the disruption goes on. The second is that many people suspect that this is an inflexion point, geopolitically and economically, but feel that the long-term implications are still unclear. If so, it may be more sensible to do little and wait and see, rather than overreact wildly.

Brazil could prove to be a winner

So who, potentially, are the winners? The crisis will increase the focus on energy security, which should support commodity prices (short-term) and resource investment (medium-term). At a top-down level, maybe this will be good for Brazil. Yes, this is an economy with a long history of unfulfilled promises, but it is one that has done very well in previous resource booms.

Brazil's market is up strongly over the past year, but has not moved much in this crisis. On a forward price/earnings ratio of ten, it is not as cheap as it sounds (a cyclical economy should trade on low valuations), but it is not expensive. Brazil's economy is not immune to higher energy costs – diesel and fertiliser prices are rising – but very high use of biofuels should help insulate it to some extent. I am considering buying the Xtrackers MSCI Brazil ETF (LSE: XMBR).

What about the losers?

The crisis may accelerate the decline of the US dollar as the global reserve currency. The assumption is that this will be a gradual process given how embedded the dollar is in the global financial system – but we should remember that ruin often happens “gradually, then suddenly” in the words of one of Ernest Hemingway's characters.

Fewer foreign buyers for US Treasuries does not mean that America must go bankrupt – I do not think there is any likely way that America will default, other than stupid political theatrics around the nonsensical debt ceiling. However, the choices that it might one day have to make to avoid bankruptcy probably point either to much slower growth or higher inflation.

More broadly, it is hard to guess at this point what the implications are if the US dollar loses its unique status. A global financial system that no longer uses the dollar – and by extension many American companies – as the lynchpin of so many transactions could look very different. To take just one speculation, I hold Mastercard and Visa in my portfolio – I wonder how vulnerable they could be to potential efforts to decouple the world from America.

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Andrew Van Sickle: Healthcare is a broad term. Could you start by outlining what exactly is in the MSCI World Healthcare index, the benchmark for your fund?

Sven Borho is the co-founder and managing partner of OrbiMed, and portfolio manager of the Worldwide Healthcare Trust.

Sven Borho: It captures every single part of the industry. You have the big pharmaceutical groups; more innovative smaller-cap pharma and biotechnology firms; generic drugmakers; medical-device makers; and service providers. These are the big health-management organisations (HMOs) in the US (the health insurers) and private hospitals. The index is diversified across the US, Europe and Japan, although it doesn't capture healthcare in emerging markets.

Andrew Van Sickle: It's often said that “health is wealth”, and investors have traditionally been able to count on both structural growth and income in this sector. But the index has had a difficult decade. What has gone wrong?

Sven Borho: One problem is that the price of pharmaceuticals became a political football, creating years of uncertainty. Drug prices were a key theme in the presidential election between Hillary Clinton and Donald Trump. We got a form of drug-price controls under Joe Biden, and the regime was tightened when Donald Trump returned to power.

The other key headwind was the rise in interest rates over the past few years. That hampers growth stocks, such as smaller biotechs, as dearer money reduces the present value of future profits. The S&P Biotechnology Select Industry index went nowhere between mid-2015 and mid-2025. The S&P Health Care Select Sector index gained 60% over that period, compared with 300% for the S&P 500 or 400% for the Nasdaq.

Andrew Van Sickle: Is the drug-price threat receding now?

Sven Borho: Yes, the sector knows where it stands now, so the uncertainty discount has started to recede. Trump was irritated that US drug prices were higher than elsewhere. He has now cut a deal with the sector, whereby the government will pay lower prices for future drugs and for current ones being delivered to Medicaid and Medicare programmes. The deal is being done with most-favoured nation (MFN) pricing, whereby prices will match those offered to a basket of other developed countries.

Meanwhile, mergers and acquisitions (M&A) are on the rise as big companies try to compensate for major drugs going off patent. When a drug reaches that stage, prices collapse by 98% as generic competition takes its toll. Merck's Keytruda, for instance, a cancer drug with annual sales of $30 billion, goes off patent in 2028. Each of the Big Pharma companies will see a large product go off patent between 2025 and 2028. This coincides with the Trump government's pricing deal, so the sector is facing a double whammy.

History shows it is impossible to rectify a pipeline gap like this through internal research and development (R&D) alone. So the big names will go shopping, acquiring the right to develop a drug from smaller firms with promising products, or buying them outright.

Big Pharma wants products with annual sales potential of $3 billion and above. If you're a speciality pharma firm or a biotech with a drug boasting that kind of potential, you're on someone's shopping list. That is why 30% of our portfolio is in biotech companies, with a heavy focus on those most likely to be bought out. Overall, 12% of the portfolio comprises a “basket” of the stocks most likely to be bought out.

Andrew Van Sickle: Returning briefly to drug development, what proportion of drugs successfully move from discovery to approval?

Sven Borho: The percentage hasn't changed much over the years: one in ten make it from pre-clinical trials through to regulatory approval. This is the biggest bottleneck in the sector. One can't speed up the process, which takes ten, even 15 years. Patients need to be on a drug for a certain amount of time, for instance.

And costs have risen sharply. Traditionally, it would cost around $1 billion to bring a drug to market. These days, it's north of $2 billion. Getting one person enrolled in a clinical trial can cost $300,000. Compliance and regulatory requirements, along with the general inflation trend, have driven up expenses.

Andrew Van Sickle: What effect could AI have on the sector?

Sven Borho: It is likely to help us come up with more compounds to test, but that will just add more potential treatments to the bottleneck building up before the clinical testing process. It is in the areas of diagnosis and treatment of disease that AI will be transformative. Given how it can amalgamate data – including your blood tests and MRI scans, say – and compare new information to it, it should become far better than a GP at diagnosing and treating disease. It may not be too long before people don't see a GP at all.

This should massively reduce costs – as should robots performing surgery. I think manual surgery will be a thing of the past in the not-too-distant future. Already today, you could have a physician operating in London on a patient in New York with a medical robot. One of our favourite companies, therefore, is Intuitive Surgical, which manufactures robotic surgeons.

AI should allow us to get a grip on healthcare expenditure; 12% of total healthcare spending (which in the US comprises a fifth of GDP) is on drugs, a proportion that hasn't changed over the years. Hospitals, surgeries, GPs and so on account for the rest. There should now be deflation in that 88%, counteracting the expense of the ageing of the population.

Andrew Van Sickle: What impact will weight-loss drugs have?

Sven Borho: People tend to think of the cosmetic element, and of course that spurred early adoption, but the big story is the impact on chronic diseases linked to excess weight, notably the big ones: cardiovascular disease, cancer and diabetes. Data suggests these treatments cut your chance of contracting Type-2 diabetes by 80%.

There are spillover effects in other areas – sleep apnea, for instance, or hip and knee surgeries, the odds of which dwindle if you are walking around with 20% less body weight. The next stage of the boom will be increasingly common oral treatments rather than injectables, with Eli Lilly the leader in the subsector. Weight-loss is a thriving division for other big names, but for me the most interesting way to play weight-loss drugs is Structure Therapeutics.

It focuses on oral treatments for obesity and related diseases. It has an oral obesity treatment about to enter phase III (the final stage of clinical trials) and it is second only to Eli Lilly's. It should hit the market a year after the pharma giant's treatment (which is supposed to arrive this month). The group will probably be acquired. Weight-loss treatments will be the largest drug category for years to come.

Andrew Van Sickle: Tell us about your fund and its top-three holdings?

Sven Borho: We launched it in 1995; I have been in the sector for 35 years. The trusts's net asset value (NAV) enjoyed a compound annual return of 13.5% from the fund's inception until the late spring of 2025, eclipsing the benchmark index's 11.3%. The secret to our success is an enduring focus on innovation – the highest-growth companies. We've always been agnostic about where those companies are, so we are widely geographically diversified. Our overweight position in biotechnology compared with the benchmark again highlights the concentration on innovation.

Eli Lilly, AstraZeneca and Boston Scientific are the top-three beyond our M&A basket. The last is one of the fastest-growing and best-managed medical-devices firms, a long-term compounder with 15% yearly growth in earnings per share. Eli Lilly is a bet on the weight-loss theme. AstraZeneca is the second-fastest growing pharma group in the world, mostly driven by oncology. We like to identify the fast growers, even in the large-cap segment. Intuitive Surgical and Boston Scientific are the fastest-growing medical-technology firms.

It's worth highlighting our holding in China's Jiangsu Hengrui Pharmaceuticals too. It's worth 5% of the portfolio and provides access to the extraordinary innovation in the Chinese pharma sector. Jiangsu has an R&D pipeline of approximately 150 projects, the second-largest in the world after Pfizer's 156. They have a competitive compound in practically every area.

What's more, going from the pre-clinical stage of the pipeline to phase one or two data (the stage at which you receive the first efficacy data in human clinical trials) takes them a third as long as Western companies and costs them 90% less. The scientists doing the work are just as qualified as in the West; many will have done their PhD or worked in a biotech here. Costs of R&D are much lower in China, as is the regulatory burden, especially when it comes to early stage trials.

Once they get to phase three of clinical trials, however, it gets trickier. A Chinese firm can't do those trials in Western markets. It has to licence the drug out to Western counterparts. The US regulator, the Food and Drug Administration, doesn't trust Chinese data, while there are also political sensitivities surrounding the process. As a result, Western firms' heads of R&D go to China to or three times a year to discuss such deals, which can be massive.

That is a transformative theme. At the epicentre is Jiangsu Hengrui. It is the Chinese biopharmaceutical equivalent of Nvidia. It is the biggest innovator. I mentioned that Jiangsu's number of R&D projects in clinical trials is second to Pfizer's, but if you include pre-clinical projects, it has the world's largest pipeline. I think it has another 500 projects. And the quality of its compounds is absolutely first-class.

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Optimistic investors can find some reassurance in the latest edition of the Global Returns Yearbook, compiled annually for UBS by Elroy Dimson, Paul Marsh and Mike Staunton. Since the study has its origins in Triumph of the Optimists, a book they published in 2002, this is hardly surprising. In it, they chart the progress of the global economy and financial markets since 1900.

Since then, US equities have provided a compound annual return of 9.8%, compared with 4.6% for Treasury bonds, 3.5% for short-dated bills and inflation of 2.9%. This gives an annual real return of 6.6% for equities and 1.6% for bonds. Since 1960, emerging markets have outperformed, too, returning 10.9% annually against 9.6% for developed ones. The charts over time all stretch reassuringly from bottom left to top right. Setbacks, even in real terms, are overcome, and every peak is higher than the last, as is every low point.

“Inflation has an important impact on long-term returns,” the authors caution, with real returns highest when inflation is lowest, especially if economic growth is also higher. Gold “has been effective at beating inflation over the long term”, with the real gold price multiplying 5.2-fold since 1900 in real terms in dollars and 12.2 times in sterling. However, barring the bubble in the 1970s, almost totally unwound by 2000, it was a dud investment for the first 100 years.

Optimistic investors still have to tread carefully

Therein lies a problem with taking too much comfort from the data; long-term investors may think in terms of ten years, but nobody invests for 100 years. The FTSE 100 took more than 21 years to regain its millennium-eve peak of nearly 7,000; in the meantime, dividend income was earned, but inflation ate away at real values. Wall Street didn't regain its 1929 peak until 1954 and traded sideways from 1966-1982, as did UK equities. The Stock Trader's Almanac shows a pattern of markets struggling in periods of inflation (as in the 1960s and 1970s) and then roaring back as inflation fell.

This isn't the only problem. International investment is a relatively recent concept; for most of the 126 years, investors were largely confined to their domestic market. Exchange controls remained in place in the UK until 1979 and even “global” portfolios were normally 50% weighted to the UK until considerably later. The US, the Yearbook points out, accounts for 62% of the MSCI All Country World index, yet the US's share of developed markets' GDP peaked at around 62% in 1950. It is now 36% and slowly rising, as is China's at 23%. In 1900, the UK was the largest stock market, accounting for nearly a quarter of the world's total. New York, with 16%, was only just ahead of France, and Russia was just behind Germany at 9%. The Russian market disappeared in 1917 and again in 2022.

Historian Niall Ferguson has shown that World War I was neither predictable nor expected – it was a total shock to investors until Austria's ultimatum to Serbia. When war started, most bond and equity markets closed, some for years and some never to reopen. This, he argues, averted the greatest market crash of all time. Global investors have had to be nimble and country investors lucky.

Sector and stock selection have also mattered; getting stuck in the wrong stocks has been a disaster. “Of the US firms listed in 1900, some 80% by value was in industries that are small or extinct today, including railroads (most of the total), textiles, coal, iron and steel. Technology and healthcare, now half the market, were almost totally absent from stock markets in 1900.” Railways accounted for nearly half the UK stock market in 1900; its exposure to technology is still tiny.

Growth drives markets, not shocks

The lesson for optimistic investors is that you may be able to bury gold for 100 years, but you can't bury a stock portfolio. The market changes gradually, but those changes can accumulate and end up huge over time. Investors should fear an extended period of high inflation, of which there have been three since 1900, two associated with world wars. The very low inflation of a few years back is probably gone for good, but that does not make a return to the inflation of the late 1960s and 1970s likely.

The period since 1900 has been punctuated by geopolitical events, but as the Yearbook shows, “economic risk has proved more significant”. Market analyst Ed Yardeni endorses the point, showing that earnings growth and economic expansion drive markets, not geopolitical shocks. Media pundits have been surprised and disappointed by the limited impact of the latest Gulf war on equity and bond markets and claim that markets (ie, investors) have got it wrong.

Usually, though, markets are right and the pundits are wrong, so it makes more sense to ask why their analyses are flawed. This isn't difficult. Each unit of economic growth consumes only 30% of the energy of 50 years ago. Pundits like to claim that 20% of the world's oil passes through the Strait of Hormuz, but that includes oil bound for India and China, which is being let through. The Saudis have a major pipeline to the Red Sea and the pipeline from Iraq to the Mediterranean could be reopened.

Most importantly, a period of high rises will lead to a boom in exploration and production around the world. Oil and gas prices have probably peaked already and will fall sharply in the years to come. That the markets have been resilient on the downside and recovered sharply on any prospect of good news does not suggest that they are complacent, but that there is plenty of upside when an end to the conflict becomes visible.

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What is it about our inclination to pessimism? The fact is, our brains are hard-wired this way. All our optimistic ancestors have long since exited the gene pool, nourishment for sabre-toothed tigers. As a result, we are drawn to doomsday predictions.

Despite all evidence to the contrary, we are persistently attracted to stories of our imminent demise. Meanwhile, the daily grind of human progress continues, quietly compounding across countless areas of our endeavour.

The grandfather of modern economic pessimism is the Reverend Thomas Malthus, who in 1798 proposed that while populations grow geometrically, the resources required for sustenance only grow linearly. The man his parishioners called “the Dismal Parson” predicted humanity would be locked into a future of famines, plagues and systemic loss of moral virtue. His belief that we would forever outrun our ability to sustain ourselves was all part of God's way of encouraging us to do better.

However, the economic reality of the two centuries following his death incinerated Malthus' Theory of Population. Yet his dismal ghost haunts us today through cohorts of gloomsters and doomsters who view every addition to the world's wondrous population of eight billion as a step toward our inevitable demise.

Indeed, as the human population clock clicked past eight billion in November 2022, The New York Times featured a radical Malthusian group called The Voluntary Human Extinction Movement (VHEMT). The piece, referring to its founder and leader, Les Knight, was entitled Earth Now Has 8 Billion Humans. This Man Wishes There Were None. Knight said he disagreed with China's one-child policy, as even one child is too many. It is tempting to discard Knight and his 100,000 followers as fringe anti-human cranks. But when such self-loathing is profiled with curiosity rather than contempt, at a time when human progress is often framed as a planetary crime, it seems that a pro-human stance has become a contrarian position in many circles.

The deluded Malthusian tradition lost a key leader this month with the death of biologist Dr Paul Ehrlich, author of The Population Bomb and a contributor to the 1970s environmentalist handbook The Limits to Growth. Both books were Malthusian retreads with headline-grabbing end-of-the-world predictions. And just like Malthus's predictions before them, none of Ehrlich's prognostications proved remotely accurate.

Despite this, The New York Times claimed in a 2015 article about his work that he wasn't wrong but premature, a man ahead of his time. The article said that expanding human populations cannot be sustained on an Earth with finite carrying capacity; the only uncertainty concerns the timing and severity of the rebalancing that must inevitably occur. Blind Malthusian assertions continue despite centuries of evidence to the contrary.

In his day, the linear-thinking Malthus duelled with the systems-thinking, positive-sum economist David Ricardo, he of the Theory of Comparative Advantage. Ricardo understood markets, and he applied that understanding to earn a fortune in the City of London while still a young man. His ideas helped spur the growth of global free trade, contributing to the geometric expansion of the world's wealth over the following 200 years. By the 1970s and 1980s, Ehrlich's deluded fatalism famously collided with economic reality in the person of Julian Simon. Following his rigorous work on economic scarcity, outlined in his seminal text The Ultimate Resource, and tired of environmental hysteria, Simon challenged Ehrlich to put his money where his mouth was.

Simon proposed that Ehrlich select five natural resources (he chose chromium, copper, nickel, tin and tungsten) that he had predicted were on the verge of terminal depletion. Simon said the real price of this basket would fall over the following decade, making its constituents less scarce. Ehrlich accepted the bet, disputing Simon's point that resource price signals incentivise new supply, including improved technology and the discovery of substitutes. As Zaki Yamani, Saudi Arabia's former minister of petroleum, noted, the Stone Age didn't end because we ran out of stones.

Why pessimism isn't the way forward

The bet was settled in 1990. All five metals had dropped in price. Simon won decisively. However, despite settling the bet with a cheque for $576.07 on 11 October 1990, Ehrlich's refusal to accept the lesson was telling. He completely missed the essence of Simon's optimism, and his refusal to accept pro-human thinking endures. Today, many more people are aware of Thomas Malthus's ideas than of David Ricardo's.

However, while the intellectual rewards and public adoration might flow to Ehrlich and Malthus, the financial prize is repeatedly won by those prepared to back human adaptation. Simon's lasting insight is that the only truly scarce resource is the connected minds of free people. Over the long haul, human adaptation makes physical limits irrelevant, an important point to remember as large parts of the world's hydrocarbon supply chain remain locked on the wrong side of the Strait of Hormuz. The Simon-Ehrlich wager was far more than a financial bet. It was a trial between two philosophies: is humanity the victim of a finite Earth or the creator of an infinite future?

Human ingenuity is our only hope, and it is time we stopped apologising for our existence and started celebrating our capacity to evolve a better future. Our daily grind of improvement deserves celebration. The passing of deluded Malthusian charlatans like Ehrlich, like any loss of human life, should be mourned. But their anti-human ideas deserve to die with them.

Jeremy McKeown is market strategist at Dowgate Wealth, writes the HyperNormalTimes Substack and hosts the podcast In The Company of Mavericks.

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One of the many unusual things about the Middle East crisis is that many markets still seem reluctant to treat it as a crisis. Take stocks. Yes, markets have fallen since 28 February, but still by far less than you'd expect given the scale of the conflict, the disruption to global energy supplies and the complete uncertainty about how long this may go on.

At the time of writing on Wednesday, the MSCI World index of developed markets is down by about 5.5% in sterling terms. The MSCI Emerging Markets is worse, down about 10%. This is not nothing, but it is considerably less than most investors would have expected in response to Iran closing the Strait of Hormuz.

Still, there is obviously some variation within this. The US continues to hold up better than most of the world (down 4%). Energy has rallied as you'd expect – the MSCI World Energy is up about 10%. Tech stocks have been fairly steady. Cyclicals such as consumer discretionary, materials and real estate have mostly done poorly.

Yet defensives such as consumer staples and healthcare have also been very weak, which is unusual at times of stress. This may partly reflect fears about input costs – many of which are affected by oil and gas prices – and the challenge of passing those on when incomes are under pressure, but it's not entirely easy to justify.

Little room for safe havens in the Middle East crisis

In fact, safe-haven trades in general are not really doing what you'd expect in the Middle East crisis. The US dollar is stronger against other currencies on average, but not by much. Gold has fallen by about 15% – very much at odds with its reputation. One popular explanation for gold's weakness is the prospect of higher interest rates – these are typically viewed as a headwind for gold, all else being equal. Another is that after such a strong run-up over the past year, investors – especially those with leverage – decided to dial down their risks by taking some profits.

Bonds have also been no sanctuary; they have fallen in response to the threat of higher rates. Yet even here, the story is not clear. Medium and longer-term bond yields are up – the 10-year gilt soared from 4.2% to over 5% – which sounds as if markets are pricing in higher inflation. Yet yields on inflation-linked bonds have marched in lockstep with conventional bonds, meaning that inflation expectations are unchanged (see above for US bonds, the UK is similar).

Can we make much sense of this? Maybe. There is some optimism that the Middle East crisis will not be too prolonged or stocks would be doing much worse. Still, markets are anticipating slower global growth, with the US coping better than the rest. They expect central banks to run tighter monetary policy in response to the threat of inflation, but the medium-term impact on inflation should be muted. There's a desire to reduce risk (hence profit taking in gold), but not to be too defensive because the last decade has shown that defensiveness doesn't pay. All told, it's plausible, but it is the best-case scenario. Doubts must rise if the war lasts much longer.

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The view that utility companies are a safe haven for cautious investors is out of date. Today's market is far more active and complex than it was even five years ago. New regulations and a strong push from government to improve national resilience are driving this shift.

While headlines dwell on short-term political disputes, the bigger story is that the utility sector is being rebuilt. The drivers of this trend include a massive surge in demand for electricity driven by the digital economy, a regulatory overhaul of the water sector and a new partnership between private capital and the state with a view to lowering risk.

Utility companies come in two main flavours

You can divide the utility companies into two distinct groups. First are the companies that own and operate the heavy assets. They run the water pipes, electricity wires and pylons that keep the country functioning. Second are the service providers. These focus on data, billing and the technology that links the grid to the customer. Each group presents a different investment case.

The UK is at the start of a major, long-term infrastructure cycle and the work ahead is vast. The challenges range from meeting the energy demands of AI to modernising water networks. Both sides of the utilities sector are evolving in response and the market is recognising the growth potential of businesses once seen as dull.

Britain is currently overhauling its industrial strategy and utility companies have moved from the sidelines to the very centre of national-growth policy. For decades, investors treated the stocks in this sector as a set of bond proxies. The stocks were bought for their steady dividends and low volatility, but little else. A series of strategic shifts, driven by government policy, has changed that view.

The grid is the UK economy's main bottleneck

The first major shift is a crisis of capacity in our power networks. As John Pettigrew, the former chief executive of National Grid, has pointed out, the grid is becoming the main bottleneck for the economy. In 2023, he stated that the country needs to build seven times as much infrastructure in the next few years as it has in the past 30.

The problem is that the physical grid was not designed for the modern world. Engineers originally built most of this network to move power from large coal plants in the north down to the south. It was designed to serve houses and light up streets on a cold winter night. It cannot process the sudden, massive surge of electricity needed for the giant data centres that power the modern economy. This has created a backlog of projects waiting to be connected to the grid.

In 2026, the backlog of demand for data centres hit 50GW across 140 different sites. To put that number in perspective, the peak demand for electricity for the entire British grid is roughly 45GW. This means one single industry is now asking for more power than the entire nation uses on its coldest winter night when everyone is indoors using electricity. Global technology giants such as Amazon, Microsoft and Google are driving this demand. They have reclassified the UK as a primary growth zone, but they can't get the power they need because the old wires are at their breaking point.

National Grid has a multibillion-pound plan to reinforce the system. This includes building new substations and using advanced low-loss conductors. These technologies let the grid carry significantly more power without needing to put up entirely new pylons everywhere. This is a high-return path for growing assets because it avoids many of the planning headaches that come with new construction.

To handle the surge in demand, the government and the new National Energy System Operator have officially scrapped the old first-come, first-served model for grid connections. That old system let speculative projects sit on capacity for years, which stopped better-prepared data centres from getting online.

The new so-called Gate 2 reforms now prioritise projects based on how ready they are and how well they fit the national-energy plan. If a project misses its milestones, the operator immediately cancels its connection offer.

This allows National Grid to move from fixing things as they break to investing ahead of time and it can now justify building infrastructure before a data centre is even finished. This shortens the gap between spending money and earning a return, which is a clear win for shareholders.

The era of underinvestment in the water sector is over

A second major shift is happening in the water sector. The industry is moving away from a period of intense public and political tension. This was caused by years of underinvestment, resulting in frequent leakage and sewage spills that polluted rivers. The sector was essentially focusing on the short-term health of the pipes.

Adding to the pressure is the rise of AI; data centres do not just need electricity, they also require millions of gallons of water for cooling, making water companies a vital part of the tech infrastructure.

The 2026 White Paper, “A New Vision for Water”, is about making national infrastructure more resilient. The sector is starting a £104 billion investment programme for the five-year stretch that began in April 2025. This is nearly double what the companies spent in the previous five-year cycle. A single, integrated body that looks at both the environment and public health has replaced the previous fragmented oversight of Ofwat and the Environment Agency. This new regulator cares more about long-term results.

The Water Industry National Environment Programme is the main force behind this massive spending. It puts £24 billion specifically toward cutting sewage spills and cleaning up rivers. The programme requires companies to install thousands of monitors that track water quality around the clock. This ends the days when companies could essentially mark their own homework.

For investors, the focus has shifted from simple efficiency to whether these companies can actually finish such a mountain of work. The new rules introduce 25-year delivery plans to give pension funds the certainty they need by matching investment timelines to the long life of water pipes and plants.

Utility companies have a state-backed safety net

The third, and perhaps most important, shift is the emergence of a new partnership model between the state and utility companies. Historically, massive infrastructure projects were often considered too risky for private investors; if a project failed or stalled, the financial loss could be ruinous. To solve this, Great British Energy and the National Wealth Fund are now fully operational, reducing risk across the sector for investors.

With its £27.8 billion capital base, the National Wealth Fund has attracted more than £100 billion in private investment by offering debt guarantees and taking the first loss on higher-risk projects.

Essentially, the state acts as a buffer and makes projects safer for pension funds to back. This approach is especially valuable for emerging technologies such as long-duration energy storage and small nuclear reactors. Great British Energy also acts as a co-developer. It takes on the early risk of projects failing due to such things as environmental assessments. This leaves listed utilities free to focus on the high-margin work of building and running the assets. Because the state is now a partner in building core infrastructure, the investment risk to the whole system has dropped.

This state-backed safety net is also showing up in the retail energy market. The Great British Energy Local Power Plan provides cash for community energy projects that help keep the local grid in balance. This move toward decentralisation takes the weight off the distribution networks that the big utilities own. It lets these companies hold off on expensive physical upgrades and instead use digital tools to manage demand for power.

As more households pick up smart meters and tariffs that change based on the time of day, the whole system should work better. The shift to a data-heavy grid is turning the retail business into a high-margin tech platform. This change is a big reason why the outlook for the sector is better than it has been in years.

Key themes and plays for investors

The investment case for the listed companies is no longer just simply waiting for a dividend. It is about identifying which can most effectively turn this massive wave of state-backed capital into growing assets. For investors, the current market offers opportunities in companies that are becoming essential to the digital and green future of the country.

National Grid (LSE: NG) is the most obvious name to benefit from modernisation of the grid. As the sole owner of the transmission network across England and Wales, it is the physical gatekeeper of the emerging AI revolution. Under the RIIO-T3 regulatory framework that begins in April this year, the company has secured a real allowed return on equity of 6.12%. This is a decent improvement on the past, reflecting a need to attract more investment as well as the higher cost of funding the great grid upgrade.

Morgan Stanley recently pointed out that National Grid is moving away from being a low-growth utility and becoming a premium infrastructure investment. It highlighted that the company now has an asset growth target of 10% per year – well above the rate of inflation – and is heading toward earnings growth of 6%-8%. The firm is spending billions on 17 major projects to reinforce the north-to-south power corridors – essential for bringing power from offshore wind farms to the data-centre hubs.

The regulatory environment now allows for anticipatory investment. This means the firm can build ahead of demand. Doing so reduces the risk of stranded assets and ensures a steady stream of regulated income. As the asset base grows, the earnings potential of the company increases in a way that was not possible under previous rules. This shift from a yield-based valuation to a growth-based one is a key theme.

SSE (LSE: SSE) is another clear winner that has rebranded itself as a clean-energy champion. The firm is currently halfway through its ambitious investment plan, which involves spending £18 billion on offshore wind and transmission links. What makes SSE particularly interesting is how it has used the new state-utility partnership to lower its risk.

By working with Great British Energy, it can offload the early construction risks that used to weigh on its balance sheet, allowing it to maintain a strong credit rating while still pursuing aggressive expansion.

The partnership with the National Wealth Fund is also providing SSE with first-loss guarantees on complex projects. This is a significant advantage because it protects SSE from the cost overruns that often plague large infrastructure projects, lowering the overall cost of borrowing and raising returns for shareholders.

One could argue that SSE should be viewed as a high-quality infrastructure asset rather than a riskier power generator. This new reality hasn't escaped market attention – the shares have risen by 60% in just the last six months.

The winners in water and retail

In the water sector, the winners will be those who can navigate the new £104bn investment cycle. Severn Trent (LSE: SVT) and United Utilities (LSE: UU) are now working within a regulatory framework that puts long-term resilience ahead of short-term savings. This creates the potential for a large expansion in their regulated capital value, which is the base used to calculate their profits.

Severn Trent has already shown strong revenue growth following the latest tariff reset. The company is using a modular design for its assets, which helps keep construction costs low and delivery speeds high. This operational efficiency is a key driver of value.

United Utilities is also performing well, with a focus on its multi-billion-pound programme to reduce storm-overflow spills. Both companies are likely to benefit from outperformance payments if they hit their new environmental targets.

These companies offer a rare combination of inflation-linked returns and the security of a state-mandated investment cycle. The move to 25-year delivery plans provides the long-term visibility that institutional investors crave.

Centrica (LSE: CNA) and Telecom Plus (LSE: TEP) represent the technology-based, consumer-facing end of the sector. These companies do not own the heavy wires or pipes, rather the data and relationship with customers.

Centrica has moved far beyond its origins as a gas supplier. It is now a leader in flexible energy services, using smart data to help businesses and homes use power when it is cheapest. This capital-light model allows for high margins and strong cash flow without the debt burdens seen elsewhere in the industry. The company has a strong balance sheet and has been returning a lot back to shareholders through buybacks and dividends. Its move to a service-based model exposes it more to the economic cycle, but also provides the possibility of decent returns.

Telecom Plus, better known to consumers as Utility Warehouse, uses a similar approach by bundling energy with other home services. Its ability to use smart-meter data to lower wholesale costs has contributed to its higher levels of growth over the years.

By helping customers balance their own energy needs, it reduces the overall strain on the grid. This creates a win-win situation where the company earns higher margins and the customer pays lower bills. The scalability of this digital model is a significant advantage in a world where physical infrastructure is expensive and slow to build.

The heavy infrastructure is expensive and slow to build. The heavy infrastructure companies that form the core of this sector were stuck in a bit of a rut for a long time.

Over the last year or so, however, a clearer lead from the regulators has really lit a fire under their share prices. Because of that, most of the easy money has already been made, with some share prices rising by more than 50% in just a few months.

Still, we now have long investment horizons thanks to government policy. Patient investors who are happy to sit on these shares for years should see good rewards for the level of risk they are taking on.

National Grid is right at the front of this modernisation. It has gone from being a slow utility to becoming a much faster infrastructure business. It is never going to be a high-speed tech stock.

Nevertheless, its better growth outlook, along with those reliable dividends, offers a level of security that makes it one of the lower-risk stocks on the FTSE. It remains a vital part of Britain's energy future. For investors who wish to build a diverse portfolio of long-term, high-quality businesses, National Grid has a lot going for it.

The two big water companies, Severn Trent and United Utilities, have their own specific hurdles and opportunities to deal with. Both are updating their systems to meet new standards for clean water and service. They are getting a direct boost from the massive building phase the country is going through right now.

For investors looking for income, these are high-quality assets. They offer returns linked to inflation and benefit from a regulatory set-up that is far more predictable than the mess we saw in the early 2020s. There has always been little to choose from between the two as they tend to perform very similarly.

At the other end of the sector, Centrica and Telecom Plus offer a different mix of risks and rewards. These businesses depend much more on how good the management is and how the wider economy is doing. They also have to fight harder for customers in the retail market. However, they don't have to own all the heavy kit themselves.

This capital-light approach has let them keep up very high returns for shareholders through both buybacks and dividends. Telecom Plus, in particular, has shown it can grow even when things get tough by bundling home services into one efficient package.

Forced evolution brings opportunity

The utilities sector is entering a period of forced evolution. By clearing the infrastructure bottlenecks and establishing a clear partnership with the state, the industry is transitioning from being a defensive shelter to becoming a central pillar of national growth. For the patient investor, these companies offer a rare blend of stability and compounding growth, underpinned by the structural demands of the 21st-century economy.

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It is not easy to say what the Iran crisis means for markets, not least because it changes hourly. I write this on Wednesday; by Friday, anything could have happened, as Monday's near-$30 swings in the oil price have shown.

The logical assumption is that the Iran crisis will pass and energy prices will fall back. This has been the pattern in Middle East upheaval for at least a couple of decades. In that case, there is not much to be gained from fretting about short-term swings. For most of the last two weeks, this has been the consensus among investors. Markets have been much calmer than you might predict, with a few exceptions, such as the pullback in Korea, which has been flying of late. Ignore the hyperbolic headlines about “tumbling” and “plummeting” on drops of 3% or so: stocks have not been panicking so far.

Still, we can think of cases where the impact did not pass quickly (eg, Russia's invasion of Ukraine and, indeed, various events in the Middle East longer ago). That scenario favours US markets and the US dollar over most of the rest of the world in the short term. The US has greater energy security – it is a net oil exporter, and high prices will encourage shale oil producers to boost output. This is already being reflected in markets: the dollar is slightly stronger and US stocks are performing better.

With that in mind, note that while non-US stocks beat the US last year, it was only in the US where earnings met expectations, points out Paul Niven of F&C Investment Trust (LSE: FCIT). Investors who have run up European shares are keen to see growth come through. The longer the crisis goes on, the less likely that is and the more scope for market setbacks.

Three reasons to fear the Iran crisis becoming a longer war

The obvious reason for optimism is that prolonged disruption to oil exports will benefit almost nobody. Yet if you want to be a pessimist, the three main participants may feel otherwise. Iran could have an incentive to maximise disruption this time because it will make the cost of attacking it again in future seem much higher. Israel might want to continue until Iran's government falls and its military capabilities are destroyed.

The US gains nothing from a protracted crisis that keeps oil prices high, but it seems to have started this fight without a clear plan for finishing it. Markets took Donald Trump's comments about the attack being “pretty much over” as reassuring, but perhaps they should have been spooked by clear signs of an erratic president who did not seem to be in command of the facts.

So the outcome is anybody's guess. All we can say is that the world keeps looking more volatile. There have always been financial shocks (“markets climb a wall of worry”, as the adage goes), but the key difference today is that the geopolitical framework in which we invest is becoming more less stable. One key implication of this is that inflation will be more volatile because supply chains are more easily disrupted. Inflation protection – real assets and stocks with pricing power – will be increasingly important.

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Anybody who has watched the Dune films without having read the books may be confused by why an obviously high-tech space-faring future civilisation appears to have no computers. The in-universe explanation is simple: humanity had developed forms of artificial intelligence, but these machines and a small elite came to control the rest of humanity. All computers were eventually destroyed in a long, semi-religious revolt and the creation of all forms of “thinking machines” was banned from then on.

It is becoming hard not to imagine this when speculating about how AI will change the world. After all, if AI will soon do everything that its most excited proponents claim, the potential for huge job losses, the economic consequences of mass unemployment, and the broader lack of purpose and autonomy sound like exactly the kind of conditions to create mass unrest. That doesn't mean that a real-world equivalent of Dune's Butlerian Jihad would be successful in suppressing the use of AI – the Luddites did not manage to stop the industrial revolution – but the potential for social strife is there.

Yet if AI does not result in huge economic changes, it is questionable whether all the capital being pumped into the sector will pay off. There seems little doubt that AI research will be hugely significant in some areas, but that doesn't mean it will transform work more widely. We may end up with a lot more middle-management jobs supervising and fixing the output of AI tools. This could create its own problems – how do young workers gain skills and expertise if the basic work on which they learn is done by AI? – implying that long-term end-to-end productivity gains could be surprisingly scarce.

Hard assets take over from ‘capital-light’ stocks

At the moment, I have no firm view on which way this goes or whether we find a genuinely useful middle course. However, it is clear that investors are increasingly concerned that many knowledge-based activities are potentially at risk from AI. Hence they are rotating away from these stocks towards those with businesses that are rooted in the physical world. You can understand the logic: it is difficult, for example, to replace a railway with a large language model.

There are other trends supporting this. AI disruption is clearly driving attention in real assets, but it also sits alongside a wider set of pressures that includes defence and security, energy needs and healthcare demand, as the team at Ruffer Investment Company (LSE: RICA) points out. This is an environment in which it becomes attractive to own “constrained sources of supply” such as commodity equities, as a hedge against inflation and other shocks.

More broadly, a shift to firms with hard assets is very different to the consensus that has prevailed for well over a decade. Investors have come to see asset-light stocks with low capital expenditure as safer and more desirable. This remains purely speculation at this stage, but maybe a tense, volatile world with a focus on security means that old-fashioned heavy industries will be the darlings of the next cycle.

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“Generals are always prepared to fight the last war,” as the old adage goes. It is easy to base our expectations on what happened in our last big bull market or bear market. This is why some modest rumblings in private credit are getting so much attention. Anybody who sat through the prelude to the global financial crisis as subprime mortgages went awry may feel they’ve seen this before.

The latest wobble here involves Blue Owl, an alternative investments manager that is heavily exposed to the private credit market, and two of its funds: a listed fund called Blue Owl Capital Corporation, known by the ticker OBDC, and an unlisted fund called Blue Owl Capital Corporation II, known as OBDC II.

Late last year, redemptions in OBDC II rose to a point where it would have had to halt redemptions. So Blue Owl proposed that OBDC II merge into OBDC. Since OBDC is listed, investors would have been able to sell shares at any time.

However, the terms of the merger would effectively have marked down the value of investments in OBDC II by 20%, since OBDC was trading on a discount to net asset value. Unhappy investors squashed it.

Now Blue Owl has said that regular redemptions in OBDC II will be halted permanently anyway.

Investors will get back 30% of their capital soon, with the rest returned over the coming years. The 30% will be funded by selling part of OBDC II’s portfolio to new Blue Owl-run vehicles backed by US pension funds as well as an insurer owned by Blue Owl. OBDC and another Blue Owl fund are also selling assets in the same deal.

The bullish argument is that although OBDC trades at a discount to net asset value and skittish investors have been pulling their money from OBDC II, institutional investors are willing to buy the assets at solid prices (99.7% of carrying value).

Cynics will counter that the new investors will be buying the best loans and that some of the rest of the portfolio would not trade so well. We can’t know which take is fair and that’s the problem.

Private credit troubles could weigh on the wider market

Investors are clearly getting more nervous about private credit. They worry that some funds have lent a lot to software and tech businesses that could, variously, face an existential threat from AI or from an AI bubble bursting (choose your poison).

The lack of transparency in the sector makes it hard to see how well loans are performing and how strong lender protections are. And if they get rattled, they have every reason to rush for the exit while they still can.

This does not mean that private credit is set to be the subprime crisis of this cycle. We don’t want to plan for the last war. So we shouldn’t look at this as the same kind of systemic threat that will spark a global meltdown. Yet given the substantial role that private credit now plays in fundraising and financing, a seize-up here could put the wider market under more pressure.

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I must admit to being rather disappointed that Donald Trump has chosen the wrong Kevin to be the next chair of the Federal Reserve. For many months, Kevin Hassett – who investors with long memories may know as the author of the laughable Dow 36,000 – sat in pole position. Appointing him would not have been good for the Federal Reserve’s credibility, but his obsequious enthusiasm for cutting interest rates promised to be very entertaining. Sadly, Trump changed his mind, and we have been robbed of the central bank boss that our peculiar times deserve.

Still, any idea that Kevin Warsh will be some kind of interest-rate hawk does not sound plausible, regardless of his position when he was last at the Federal Reserve 15 years ago. He appears to be in favour of cutting short-term rates aggressively, if not quite as aggressively as Hassett. At the same time, he also wants to shrink the Fed’s bond holdings. The latter course of action should, in theory, mean higher long-term yields, since the Fed will no longer be mopping up so many longer-dated bonds, and a steeper yield curve. How that squares with treasury secretary Scott Bessent’s desire to cap longer-term yields is unclear, to say the least. All told, the outlook could get quite confusing.

The Federal Reserve is an institution that Republicans still seem to care about

Of course, this assumes Warsh is confirmed as chair and manages to get enough of the Fed governors on his side, which is by no means certain. One of the few US institutions the Supreme Court and Republican senators still seem to care about shielding from presidential whim is the cargo cult of modern central banking. Trump has been able to get away with extreme levels of overreach in practically every sphere, but giving him free rein over the panel of technocrats who can supposedly guide the direction of a $30trillion economy by tinkering with interest rates is apparently a step too far. Nonetheless, past experience suggests he will more or less get his way. If so, Warsh’s statements seem consistent with how our asset-allocation portfolio is positioned. We remain concerned that longer-term bonds offer too little compensation for the risk of higher yields and higher inflation (not just in the US but in the UK and elsewhere) and so we are sticking to short-term bonds.

Part of our protection against central banks getting it badly wrong is our 10% allocation to gold. I am doubtful that the rapid sell-off in gold at the end of last week had much to do with Warsh’s appointment, even though that explanation has been widely quoted. Metals had rocketed the previous week with clear signs of speculative excess; a pull-back was overdue. Huge moves in data and digital companies that might – or might not – be affected by AI point to a twitchy and volatile market in any case.

We are not making any changes to our holdings, but investors who have held gold for a while may find that it now accounts for a much larger share of their portfolio than originally intended. If you find that you are now heavily overweight, you may want to trim a bit back to target. We will do this in our regular rebalance at the end of the tax year.

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The pension strategy of successive generations of savers means they have built retirement plans that come to fruition when they stop work – often the time when they can start claiming their state pension, currently at age 66. But many pension experts now argue that this isn’t quite the right approach; instead, they advise, 75 should be the pivotal age in your retirement planning. That’s not to suggest everyone is going to have to work until 75, although many savers undoubtedly do intend to work well past state pension age. Rather, it’s the way the pension system works today – and the way we now live – that makes your 75th birthday such a significant moment.

It’s the popularity of income drawdown that has really changed advisers’ approach. In modern times, the majority of people opt to draw an income directly from their pension funds once they decide to start cashing in their savings. The fund can be left invested to grow further – and, very often, savers continue paying into it. They may have reduced their working hours, for example, but still be earning an income.

However, under HM Revenue & Customs’ rules, you’re only allowed to keep making pension contributions that qualify for tax relief until you reach 75. Most pension schemes therefore, won’t accept new payments after this point.

A related issue is that many pension schemes have restrictions on withdrawals of tax-free cash from pension pots. HMRC’s rules allow you to take up to 25% of your pension fund as a tax-free payment, either upfront or in instalments. But because of historic complexities, such as the lifetime allowance on pension savings, many schemes make this very difficult after 75.

75 – the pivotal age when it comes to pension strategy

Another factor to consider is the rules on passing on pension savings. If you die before reaching 75, money left in your pension fund can usually be passed on tax-free to your heirs; after age 75, they’ll pay income tax on any money they withdraw from your savings. And when pension savings become potentially subject to inheritance tax, from April 2027, the bill could be even more significant.

For these reasons, it increasingly makes sense to plan towards age 75, even if you intend to start withdrawing pension cash well before then. There are no certainties because everyone’s circumstances are different, but for many people it will work well to use pension and income-drawdown plans to maximise the size of their pension pots by the time they hit 75; thereafter, the focus should shift to “decumulation” – running the cash down as you live out the rest of your life.

Another point is that most people become more risk-averse as they get older – and many start to feel less confident in their ability to manage their finances. An income-drawdown arrangement might then no longer feel like the best way to draw cash from your savings; you may become anxious about the process of managing pension savings to continue generating income and to last for as long as you need the money.

Using your remaining savings to buy an annuity – offering a guaranteed lifetime income – could be a good move. And while you don’t have to make that decision specifically at 75, many advisers say moves from drawdown to annuitisation are particularly common around this age. You’ll also get a more generous annuity rate than you would have done ten years previously, say. You may even qualify for enhanced rates if your health has deteriorated.

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Two of Britain’s most acclaimed star fund managers – Terry Smith and Nick Train – are both struggling with a multi-year spell of disappointing returns. Yet they are reacting in very different ways. Smith seems inclined to blame passive investing, company management, the state of the economy, analysts, the state of the market in general and practically everybody else, as seen in his latest letter. Conversely, Train has castigated himself and apologised at length for letting investors down, as anybody who attended the Finsbury Growth and Income (LSE: FGT) meeting this month will know.

The truth surely lies between the extremes. Train has made mistakes in stock selection, but so has Smith (as we all do). At the same time, both have a particular style and are biased towards a type of company that is out of favour in today’s markets. Almost all managers will do better in certain market regimes than others. Recognising that is crucial to deciding where to invest and what expectations are reasonable.

Both star fund managers have had to change their approach to investing

Both Smith and Train have focused – in slightly different ways – on what they see as quality companies: businesses that can grow earnings steadily, earn strong returns on capital and compound over time. They were heavily invested in areas such as consumer staples and placed considerable value on dominant brands. These kinds of companies did very well for much of the 2010s, but many have struggled this decade – not just in relative terms (understandable in a tech bull market) but in absolute terms as well.

There is a range of reasons for this. The era of ultra-low interest rates made the steady and rising income from these kinds of stocks very attractive, which pushed up valuations too high by the end of the decade. The post-pandemic inflation spike and cost-of-living pressures have hurt their ability to keep growing earnings either by selling more or by raising prices.

Emerging-market growth – a key part of the bull case for many – has been patchier than expected. More recently, GLP-1 weight loss drugs may be starting to weigh on demand not just for food but other products such as alcohol (it remains unclear how significant this is).

As these issues have become more obvious, both managers have adjusted their approach. Train is tilting towards data and digital businesses. Smith has shifted more into tech – moving in and out of some stocks with uncharacteristic speed – and has increased his exposure to healthcare. The thesis behind all these sectors is clear.

At the same time, we should note market conditions may not be as helpful to large incumbents as they were in the 2010s. There is far more uncertainty. Will data and software businesses capitalise on AI or be undermined by it? Will healthcare costs and margins come under attack in a much more populist political environment? We just can’t know at this point, and Smith is right to say that investors should be ever more alert for strategic missteps.

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Cryptocurrency does not feature in our strategic portfolio, partly because we are not yet converts to the idea of crypto as a fundamental asset. There’s an obvious appeal to the idea of a currency that lies outside government control. Yet the two biggest cryptocurrencies – bitcoin and ether – have significant disadvantages for transactions compared with existing payment networks. The need for a stable store of value is obvious given the growing long-term risks of currencies being debased. Yet gold still seems a superior choice in almost all ways. All this makes it difficult to decide whether cryptocurrency is truly a revolution that will find more and more mainstream applications, or the ultimate expression of our bubble-prone era.

Still, we certainly cannot not dismiss the way that bitcoin has soared over the past decade. Yes, much of this took place against a backdrop of ultra-low interest rates, which created many bubbles. More recently, the pro-crypto stance of the Trump administration gave it a further boost for equally speculative reasons. To the extent that US government has a coherent policy, it is to encourage stablecoins – digital currencies backed by assets such as government bonds – in an attempt to entrench the dominance of the dollar and provide a steady source of demand for the vast amount of US Treasuries it is issuing. (This is very different to supporting bitcoin and ether.)

That said, if cryptocurrency is purely a bubble, it is a resilient one – bitcoin has rebounded from multiple huge sell-offs. The more that happens and the longer bitcoin and ether stick around, the more chance they find broader mainstream use. The adoption of new standards is often down to building faith in them, which comes from seeing them tested to see if they break.

Cryptocurrency ETFs are now available to UK investors

A secondary reason we haven’t used cryptocurrency is that, until late last year, private investors in the UK could not invest in regulated crypto exchange-traded products. This was always a bizarre decision, since it pushed investors towards unregulated exchanges with much less protection. Thankfully, the regulator belatedly saw sense, and we can now access products such as CoinShares Physical Bitcoin (LSE: BITP) and WisdomTree Physical Bitcoin (LSE: WXBT).

That’s why last week I was at the London listing of the latest crypto-linked product: 21Shares Bitcoin Gold (LSE: BOLD), created by MoneyWeek contributor Charlie Morris. BOLD is an interesting idea: it holds a mix of gold and bitcoin in proportion to their past volatility, rebalancing monthly. The principle is that bitcoin and gold have low correlation (bitcoin does well in risk-on conditions, gold does well in risk-off conditions) and hence can complement each other. BOLD has been listed on Switzerland since April 2022 and over that time has returned 108% with much less volatility than bitcoin (go to bold.report for more details).

I’m not proposing BOLD for our portfolio yet, but this is the kind of basis on which we might use cryptocurrency – not as a firm view on how it will be adopted, but rather the properties it shows when trading. Crypto-curious investors may want to take a closer look at how it performs.

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What could be greener than a tree? For anyone interested in sustainable investment, forestry has obvious appeal. But the allure of investing in forestry goes well beyond its environmental credentials: the potential for competitive returns and a generous range of tax incentives are also turning the heads of long-term investors. UK forestry assets drew record investments last year, attracting hundreds of millions of pounds. Some of that money came from institutional investors, including pension funds, family offices and charities, but there are also a growing number of individuals exploring forestry investment, either directly or through a professionally managed fund.

Investing in forestry is exactly what it sounds like. You’re buying ownership of a commercial forest (or a share of ownership) – either a mature, established woodland, or newly planted land. As the trees grow, you’ll hopefully make capital returns from an increase in the value of the forest; there’s also an opportunity to generate income by selling some of the trees for timber, as Alex Davies, the founder and chief executive of Wealth Club, the investment platform aimed at high-net-worth and sophisticated investors, points out. It’s an investment for the long term.

The returns are highly tax-efficient. There’s no capital gains tax (CGT) to pay on the rising value of the trees, although any rise in land value is potentially subject to CGT. And there’s no income tax due on revenue generated from sales of timber. You’ll also benefit from generous inheritance-tax rules when passing forestry investments on following your death, as long as you’ve owned your trees for at least two years.

Don’t invest in forestry for the tax benefits alone

It’s never a good idea to make an investment purely for tax reasons, not least since chancellors can – and very often do – change the tax rules, diminishing the value of incentives and reliefs. However, even after the impact of tax benefits, forestry has an impressive performance record. “UK forestry has a long-term... record of producing strong performance with relatively low volatility, therefore providing risk-adjusted returns that are in excess of many traditional asset classes,” says Davies.

Indeed, forestry is the UK’s best-performing asset class over the past five, ten and 25 years, delivering double-digit annualised returns over each of these periods. And forestry funds in the UK have produced an average annual return of 11.4% a year since 2008, when the first such fund was launched. That’s after fees, but before the positive impact of tax reliefs.

Past performance, of course, is no guarantee of the future. But forestry is also useful as a way of diversifying your portfolio. Returns from forestry investments tend to move independently of returns from other asset classes, including the stock market; in the jargon, returns have low correlations with other assets. Forestry can, then, be an excellent way to boost the resilience of your overall investment strategy.

It is also a tangible asset that is regarded as a good inflation hedge. Demand for timber often increases during stronger periods of economic growth, as construction projects accelerate. Timber prices, therefore, tend to rise during periods of increased inflationary pressure, protecting investors from the eroding effect of inflation on their portfolios.

In any case, during periods when timber prices are lower or falling, forestry managers and funds can simply choose not to sell any of their timber. Most investable forests in the UK largely comprise Sitka spruce trees; there is typically a 15-year window to harvest these trees, so there’s no need to cut them down in any particular year. And since Sitka spruce tend to add around 5% of volume each year, waiting means there’s more timber to sell when the market looks more attractive.

The risks of investing in forestry

Still, despite these plus points, it’s important to recognise that investing in forestry also carries some significant risks. As with any investment where prices can rise or fall, there’s always the possibility for capital losses. Returns will inevitably vary – and are closely linked to the fortunes of the UK’s construction sector. During slower periods for the building trade – which aren’t always predictable – investors may see losses.

Another risk is that this is a natural asset and so vulnerable to environmental factors. Sitka spruce is considered a hardy type of tree, but it’s not immune to problems such as forest fire, wind damage, or even disease. And while it’s possible to insure trees against the risk of fire and storms, there is no cover available against disease; in the worse-case scenario, your investment could be wiped out entirely.

Perhaps the biggest issue of all for many investors will be liquidity risk – forestry is a physical asset that can be difficult to trade. If you own a forest directly, you’ll need to find a buyer when you want to realise the value of your investment, and that may take months, or even years. If you invest through a fund, there may be a set time period for return of capital; in the meantime, the manager may operate some sort of secondary market to help investors get out early, but there are no guarantees. At the very least, think of forestry as an investment you’ll hold for at least ten years.

This is, therefore, not an asset class for investors who feel uncomfortable with risk and illiquidity. Forestry will, though, continue to prove popular and potentially get even more of a boost from recent tax announcements, says Davies. “Forestry has long been a favourite among tax-efficient investors in the know. And its appeal is likely to increase now that the government has upped the inheritance-tax-free business property relief.” Even before the chancellor’s Christmas intervention, more investors were getting on board. Gresham House, one of the UK’s most established forestry investment managers, raised £375 million for its Forestry Fund VI fund, which closed to new investors last year. That was the largest fundraising in forestry ever conducted in the UK. Gresham House now plans to launch a new vehicle in April.

“We’ve had a lot of interest from private-client investors, but we increasingly have an institutional client base too,” says Anthony Crosbie Dawson, director of forestry and private clients at Gresham House. He sees that as a vote of confidence in forestry investment, since institutions don’t qualify for the same tax reliefs as individuals and therefore can’t be investing for that reason. “We raised from UK institutions, but also [from] international investors,” says Crosbie Dawson – “one of our fund investors was a Japanese institution, for example.”

The collective-fund approach makes sense for most retail investors, who get access to professional forestry-management expertise and diversification – managers will invest across multiple forests and woodlands – as well as much lower minimum investments. Buying your own commercial forest is likely to require an upfront investment of hundreds of thousands – and often millions – of pounds, plus you’ll need to manage the woodland yourself, or appoint a manager. By contrast, funds typically have minimum investments of around £50,000.

Clearly, that’s still a significant sum – and Financial Conduct Authority rules only allow forestry funds to take money from sophisticated or high-net-worth investors – but it’s a more accessible entry level than investing directly.

Par Equity – now part of PXN Group – is the other major name in UK forestry, having raised two funds already. The formal launch of its third vehicle, Par Forestry III, is expected soon, and is targeting an average annual return of 7% after charges. “The historic long-term returns from forestry have been extremely good,” said Par Equity’s investment manager Paul Atkinson in a recent interview on the Wealth Club platform, which provides access to forestry funds. “It’s also completely uncorrelated with other capital markets and a pretty good hedge against inflation and, of course, there’s increasing interest in the asset class” due to concerns about climate change.

It’s not just that planting trees and maintaining forestry is a good way to remove carbon dioxide from the atmosphere and store it, although this is important. (Indeed, some forestry funds may generate extra income from the carbon credits available from government schemes aiming to increase carbon sequestration.) It’s also that timber is far less carbon-intensive than steel, concrete and other materials that the UK construction industry has traditionally depended on. The packaging industry, also looking to reduce its environmental impact by moving away from plastics towards recyclable materials, is an important customer too.

The big picture is attractive

In that sense, the big-picture outlook for timber prices is encouraging, with increasing demand from industry buyers likely even if overall levels of activity in their sectors remain relatively flat. There will be short-term ups and downs – prices fell 5% or so in the final quarter of 2025, their first declines for two years, largely because of supply factors – but as homebuilders, for example, start to use more timber, and to work towards the UK’s ambitious new-homes targets, there should be no shortage of customers.

Not that timber prices are the be-all and end-all for investors. “The price of timber can be volatile, as with all commodities, although it’s a lot less volatile than some, but there’s not actually much correlation with the value of the asset because we own the land as well as the trees,” explains Crosbie Dawson. “Forest valuations are based on discounted cash flows over a 35-to-40-year rotation, so what the timber price is today, or in six or 12 months’ time, is not particularly relevant.” In that context, Gresham House has forecast a near doubling in global demand for timber over the next 20 years, providing an encouraging backdrop for investors considering forestry. “People do want more of their portfolios allocated to sustainable assets, but only if those assets are delivering compelling returns,” says Crosbie Dawson.

Reeves’ inheritance-tax U-turn is more good news for forestry investment

One potential driver of the renewed interest in forestry investment is the recent government U-turn on business property relief (BPR) and agricultural property relief (APR). This will enhance the appeal of forestry as a tool for families planning for inheritance tax (IHT). The two reliefs work in the same way, allowing the owners of a wide range of business assets to pass these assets on to their heirs with no liability for IHT, as long as they’ve owned them for at least two years on death. In her first Budget, in the autumn of 2024, chancellor Rachel Reeves unveiled reforms of BPR and APR; from April 2026, she announced, only the first £1million worth of assets would qualify for the reliefs at 100%, with any excess getting only 50% relief. That prompted a huge backlash from farmers worried that they would no longer be able to hand family farms down to the next generation because their children wouldn’t be able to pay the tax bill.

In December, the chancellor backed down, announcing that she would raise the planned £1million threshold to £2.5million – or £5million for couples, since the cap can be transferred between spouses and civil partners. That’s good news for farmers affected by the original proposals – but also for investors in forestry, since most investments in woodland and forestry are qualifying assets for BPR. The chancellor’s decision therefore, substantially increases the attractiveness of forestry from the point of view of IHT planning.

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The MoneyWeek investment trust portfolio was set up in 2012 with a simple principle: to help readers build a global, all-weather, set-and-forget portfolio. There have been a few changes over the years – the latest was the removal of Mid Wynd (LSE: MWY) in April 2025 after a manager change and a period of underperformance – but the goals have remained the same.

Today, the portfolio contains Personal Assets (LSE: PNL), JP Morgan Global Growth and Income (LSE: JGGI), Scottish Mortgage (LSE: SMT), Caledonia (LSE: CLDN), Law Debenture (LSE: LWDB) and AVI Global (LSE: AGT).

In 2025, an equally weighted portfolio of these six trusts produced a total return of 13.1%. By comparison, the Vanguard LifeStrategy 60% Equity Fund – a simple proxy for a 60/40 equity/bond portfolio – returned 11.6%, while the MSCI World index had a net total return in sterling terms of 12.75% – the third consecutive year of double-digit returns for the index.

How the MoneyWeek investment trust portfolio fared in 2025

Growth-focused Scottish Mortgage provided the largest boost to overall returns, adding 24.7% for the year. That amounted to a contribution to the overall portfolio of 4.1%. The trust’s returns were helped by an end-of-year surge after SpaceX said it was planning an initial public offering (IPO) in 2026 and aiming for a $1 trillion-plus valuation.

After re-valuing its stake to reflect this, Scottish Mortgage’s net asset value (NAV) stood at 1,303.47p per share as of 31 December 2025, up from roughly 1,200p at the beginning of the month. SpaceX now makes up 15.3% of the fund, up from 8.2% at the beginning of December, with the stake worth as much as £2.2 billion today, up from £508 million in September.

At the defensive end of the spectrum, Personal Assets Trust returned 10.4% last year, supported by a near 12% allocation to gold as the yellow metal surged 64.5% in 2025. Over the past five years, the trust has still lagged its benchmark, the UK Retail Price Index. However, last year’s return – its best since 2021 – regained some lost ground.

Shares in Caledonia also picked up in 2025 after several years of lacklustre performance. The trust’s total return of 11.5% reflected underlying NAV growth and the closing of the discount. The NAV rose 4.7% in 2025, according to the most recent available figures, following an 8.3% increase in 2024. Caledonia’s returns have been held back by its exposure to private equity (about a third of the portfolio), where valuations have suffered as managers have been unable to offload holdings via IPOs. However, with the pipeline of rumoured IPOs filling up for next year, that could change.

Law Debenture yielded the best performance

Of the three public equity trusts in the portfolio – Law Debenture, JGGI and AVI – UK-focused Law Debenture yielded the best performance with a total return of 22.3%, contributing 3.7% to the portfolio’s overall return.

JGGI disappointed, with a total return of 2.9% for the full year. This was the worst performer in the portfolio. Although its NAV rose 7.3%, the trust’s shares began trading a discount to NAV – the first time it’s traded at a sustained discount in nearly a decade – and this partly offset the portfolio gains. Part of this shift can be attributed to its overweight position in US equities (+7.6% compared with the MSCI World). US stocks underperformed global peers last year, and with political risks growing, investors are only becoming more wary.

AVI’s global value portfolio also underperformed last year with a return of 7%. However, we like its strategy of trying to unlock value by activist engagement with companies and its exposure to Japan and Asia.

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“We all know what to do,” Jean-Claude Juncker, the former president of the European Commission, once said, “but we don’t know how to get re-elected once we have done it.” The events of last year showed that he and many of the world economic pundits were wrong. Javier Milei was elected president of Argentina in 2023 on a radical free-market platform to resolve his country’s disastrous economic and monetary record. There followed a blizzard of measures of reform, deregulation and spending cuts, which, surprisingly quickly, yielded dramatic results: a collapse in the rate of inflation, a budget surplus, an economic boom and a sharp fall in poverty. But would he be rewarded politically?

Against the expectations of the international media and pundits worldwide, his party won a decisive victory in the October congressional elections and he looks well set to be re-elected in 2027. Not only can tough medicine yield results remarkably quickly, but the political backlash Juncker despaired of turns out to be a myth.

Donald Trump was inaugurated as US president in January and there followed another blizzard of measures that the establishment confidently predicted would be economically, socially and legally disastrous. Yet a year later the economy is growing strongly, inflation is moderate and interest rates are coming down. There are strong signs that the public-sector debt, far from being on a path of explosive growth, is coming under control, with the fiscal deficit falling fast, despite seemingly reckless tax cuts early in the year.

The lesson for market-friendly new governments is, in the words of Carl von Clausewitz, “no leader has ever become great without audacity”; or, as Franklin Roosevelt said, “I don’t have a recipe for success, but I do have one for failure: try to please everybody”. Britain’s opposition parties appear to have taken on board the need for speed and decisiveness in government, and to be prepared to ride roughshod over the establishment.

Pundits are obsessed with the “magnificent seven” – bet on the “impressive 493” instead

However, those expecting a gilt-market crisis to force change may be disappointed. Yields on US Treasury and European government bonds have remained subdued. If the US fiscal deficit continues to drop, US bond yields could even fall. Bond investors would probably see a jump in yields in the UK as a long-term buying opportunity.

The need to take dire forecasts with a large pinch of salt has rarely been as clear as in 2025. Gloom-laden warnings from eminent pundits about “bubbles” and “impending crashes” have been a regular feature of 2025’s bull market, but reports of the death of the boom may have been exaggerated. Instead, global equity markets returned 13.2% in sterling in 2025, although the 9.5% fall in the dollar meant that the US (+9.8%) significantly underperformed the rest of the world, notably the UK (+24%). What explains the pessimism? Bad news and views have always been more popular with Britain’s media than good news.

While British pundits are still obsessed with the S&P 500’s “magnificent seven”, which have led the US and thereby world markets higher in recent years, Ed Yardeni, who first coined the term, expects the market to rotate towards the “impressive 493”. That is already happening; only Alphabet made it into the top-40 performers in the S&P 500. In 2026, investors might do better to listen to optimists such as Yardeni rather than the doom-mongers.

UK interest rates were slashed four times in 2025 and twice in the second half of 2024, yet the cuts had no economic impact. Only 30% of UK households now have a mortgage and the large majority of those are fixed-rate. Those fixed rates are set by financial markets rather than the Bank of England, and the response of bond markets to interest-rate cuts has become perverse. Cuts therefore have little effect on demand for house-buying or housebuilding, and the 2008 financial crisis destroyed consumers’ and businesses’ appetite for credit.

The media, the politicians and financial commentators still pay lip-service to the “importance” of the Bank of England, its independence from political influence and the interest rates it sets, but 2025 showed its economic irrelevance. The biggest risk is that it resorts to printing money to fund the government’s fiscal deficit; we must hope that it learned its lesson from the inflation it caused in, and subsequent to, the pandemic.

Forget puntids – listen to your better half

The best lesson for 2026 comes from my wife, Judith. On a trawl through the antique shops in Barnard Castle three or four years ago, her eyes alighted on a pair of solid silver Mappin & Webb Edwardian candlesticks. I warned her that nobody was interested in buying silverware any longer and that the price of silver had been flat for decades, but she was only interested in the aesthetic appeal and how they would fit into our house. She negotiated the price down to £500 for the pair.

I eventually weighed them on Christmas Eve; 1kg each! At $70 an ounce, that represents a sevenfold return. The lesson is that the best investment is something you buy for its intrinsic appeal, not for what it might be worth in the future.

Investing in shares and bonds is a means to an end, not an end in itself. Don’t forget to spend your gains.

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I never take the flood of forecasts that investment banks and brokers produce at the start of the year very seriously, but this isn’t because the analysts who produce them are fools. Most people who work in these jobs are smart and knowledgeable. Yet the tendency of the investment industry to reward moderate bullishness at all times means that very few can put out a genuinely unconstrained view.

There are not many analysts who have the freedom to write that they think investors should have zero exposure to the US, as Jeremy Grantham argues. Right or wrong, it is clearly a strong opinion, while simply saying that investors should be “market weight” in US equities does not offer much to chew over.

Still, when you read enough of these reports, you at least get a clear sense of whether the consensus lies. While this is far from scientific, a quick overview of the thinking for 2026 probably runs something like the following.

AI spending is forecast to rise in 2026 – should investors keep backing it?

Spending on AI will keep rising, but the prospects for a technological revolution are so great that the bigger risk is not being invested. (It’s notable that fund managers seem to be rather more worried about whether there is an AI bubble than brokers are.) Stocks will go up, although there is much less optimism than last year about whether America will outperform the rest of the world after it fell behind in 2025. No region seems to stand out as a consensus pick, although there is quite a bit of interest in Japan. Interest rates will fall, especially in the US, which will be good for bond markets. However, nobody is getting especially excited about traditional credit (eg, corporate bonds) – not because they are forecasting disaster, but because valuations are fairly steep: there’s not much extra yield to pick up from riskier bonds compared to safer ones. Conversely, enthusiasm about private credit (eg, loans made directly by investors to companies) still seems high, despite a couple of high-profile defaults in the past year. Oil will remain under pressure. Gold will keep going up. Industrial metals such as copper and aluminium could do well due to tight supply and rising demand from AI infrastructure.

The biggest shift compared with last year seems to lie in the currency markets. Back then, the consensus was that the dollar would keep getting stronger as a result of foreign capital flowing into US markets and Donald Trump’s policies being helpful for the US trade deficit. In the end, the dollar weakened against most major currencies in the first half of the year before stabilising.

This year, most forecasters expect a weaker dollar, on the basis that interest rates will fall faster in the US than elsewhere. The other reason to expect this largely goes unsaid: the tail risks created by the Trump administration’s increasingly unpredictable policies are changing how investors feel about the US and making them – at the margin – more inclined to look for opportunities elsewhere. Based on the events of this week, we should expect that to continue.

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At the start of 2025, I said that investors should “beware the long bond”. The good news is that yields on the longest-dated bonds did not run wild during the year. The 30-year Treasury and the 30-year gilt are ending where they began. Yes, the 30-year bund has gone from 2.6% to 3.5%, while the 30-year Japanese Government Bond (JGB) is up from 2.3% to 3.4%. However, this is healthy: a world in which investors were willing to lend money for three decades at incredibly low rates (well under 1% at times in Japan) is very damaged, and higher long-term rates are a step towards normality.

At the same time, we are seeing early hints of an important shift. While longer-term rates are not coming down, the short end of the yield curve is. With the exception of the Bank of Japan, central banks mostly reduced rates in 2025, including cuts by the Bank of England and the US Federal Reserve in December. This is likely to accelerate in 2026 in the US: markets are underestimating how aggressively Donald Trump and whatever thrall he appoints as Fed chair will try to cut rates to juice the economy.

Time for governments to issue more short-term debt

Rate cuts alone do not solve today’s big problem for governments. Central banks directly set the rate at which they lend very short-term money to commercial banks. Expectations for this largely set the path of short-term bond yields, but longer-term yields are determined more independently by markets. So even if short-term rates come down, higher long-term yields will still push up the cost of interest on public debt.

Whenever a bond issued at miniscule rates a few years ago has to be refinanced, the new rate shoots up. Thus the amount of interest that government pay is steadily rising. They can try to cut spending to bring down debt, but we constantly see that this isn’t politically possible.

The obvious way out is to inflate away debt – but when markets expect higher inflation, they will demand higher yields to compensate, negating the gains from inflation. Central banks could hold down yields by buying up long-term bonds, but a decade of quantitative easing has shown us how much distortion this causes. The best option for now is to cut long-term debt issuance in favour of short-term debt, which pays lower yields. That is what we are seeing in countries including the US, the UK and Japan (that’s why average maturities of outstanding debt are dropping – see chart). However, a flood of short-term debt could unsettle markets and cause yields to rise. Note that earlier this month, the Fed launched a $40 billion programme of buying short-term bonds. It describes this as a technical move to manage market liquidity, but don’t be surprised if this is just the first step in central banks systematically buying short-term bonds.

So here’s a scenario. Governments issue more short-term debt. Central banks a) cut rates below inflation and b) buy more and more short-term bonds to keep yields down. Longer-term yields tick up, and the yield curve gets steeper. How will this affect markets? Is it inflationary? We should start to find out in 2026.

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Is passive investing damaging the economy?

In this episode of MoneyWeek talks, Andrew Craig, founder of Plain English Finance and author of How to Own the World and Our Future is Biotech, talks to Kalpana Fitzpatrick about the dangers of over-relying on passive investing.

He argues that while passive investing has a place and is perfect for anyone who is just getting started on their investing journey, active investing plays a critical role not only delivering returns but also in helping the UK economy thrive.

Craig also tells Fitzpatrick that young investors starting out could be damaging their wealth by confusing trading with investing.

“The problem is, they get their fingers burnt when trying to trade and then they do not invest,” he says.

Watch the full episode on YouTube or any podcast platform.

MoneyWeek Talks is a podcast that helps you unlock the secrets to financial success. Editors Kalpana Fitzpatrick and Andrew Van Sickle are joined by influential guests – from CEOs and entrepreneurs to economists and policymakers – to share their top tips on managing money, investing wisely and building wealth.

Subscribe to the MoneyWeek Talks podcast and get ready to make it, keep it and spend it with confidence.

More on investing

• What’s the difference between active and passive investing?
• How to approach active ETFs

If nothing goes awry between now and the new year, 2025 will end up being a much better year for stocks than looked likely eight months ago. The US tariff sell-off in early April was severe at the time, but the slide ended faster than expected and markets rebounded quickly.

For all Donald Trump’s bluster, the reality is that he backtracked on the level of tariffs pretty significantly. Foreign governments signed a bunch of deals to placate him, including many promises around investment and trade that they will do their best not to deliver. Central banks began loosening monetary policy a bit more. So stocks went up again: the MSCI ACWI index – which includes developed and emerging markets – have returned a very strong 18% (including net dividends) in local currency terms.

It is likely that the full effect of the tariffs is yet to show up. It is also plausible that at some point the Trump administration will a) notice that the rest of the world has no intention of actually funnelling hundreds of billions of dollars more into the US and b) start to worry about some early signs of a slowdown in the part of the economy that is not fuelled by AI spending. At that point, it may decide to start a fresh trade war with China and Europe. However, until then, we are where we are: business as usual.

A long-term view on US stocks

Yet something is different. US stocks have returned around 16% this year – an above-average performance. However, that is only just in line with Europe and well below many European countries (including the UK), Japan and emerging markets. Note too this is in local-currency terms: factor in the drop in the US dollar and investors have done better in almost any other market. This runs against American outperformance in recent years and is the opposite of what most strategists were expecting at the start of 2025.

We cannot know whether this will happen again next year. However, on a long-term view we can note that the MSCI USA index trades on a forecast earnings yield (earnings divided by price) of around 4.5%. The MSCI Europe index is on an earnings yield of over 6.5%, the MSCI Japan is around 6% and the MSCI Emerging Markets is a bit under 7.5%.

In theory, the earnings yield is a direct proxy for expected longer-term real returns. You either get earnings back as dividends or reinvested by companies to create growth – either way, a higher yield should mean stronger returns. Reality is never that simple, but it is unarguable that the US will have to keep delivering much better earnings growth than the rest of the world to overcome the drag of starting on a lower yield.

So on a longer-term view, the odds are in favour of an extended spell when the rest of the world outperforms. This is why our asset allocation portfolio – which I will be reviewing shortly – keeps significantly underweighting the US despite its strong past performance. That call may finally be starting to work in our favour.

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Investment trusts are one of the best vehicles for creating wealth over the long term. Yet many of today’s trusts should not exist. Some are too small to make a difference and lack economies of scale. Others are not making the most of the benefits that the investment company structure offers.

An investment trust is set up as a public limited company, which has several advantages over other collective investment vehicles. Their closed-ended structure with fixed capital means that they don’t have to worry about money flowing in and out. That’s perfect for holding illiquid assets and also for borrowing money to improve returns. Meanwhile, the oversight provided by the board of directors should hold the investment manager accountable if the trust underperforms for too long.

However, this structure has two obvious drawbacks. One is overheads. Having an independent board of directors is expensive. Valuing and managing illiquid assets can also be costly and time-consuming. Paying for active investment managers has never been cheap, and it’s even more dear if the trust has an in-house management team, rather than sharing a manager who works across several funds. The combined impact of these costs means that many smaller trusts look expensive to their larger peers or open-ended funds with comparable strategies.

The other is that the share price can – and usually does – deviate from net asset value (NAV). So shareholders cannot be sure if they will be able to sell at close to the value of the assets. In contrast, open-ended funds and exchange-traded funds (ETFs) trade at NAV.

Investment trusts need to start taking their advantages

So trusts need to employ their advantages to justify the disadvantages. Take leverage, which is one reason why trusts have tended to outperform similar open-ended funds over the long term. Trusts can usually borrow at highly attractive rates for long periods. The Scottish American Investment Company (LSE: SAIN), for example, issued three lots of loan notes several years ago, with maturities extending out to 2049 at rates of 2.23% to 3.12%. Yet most trusts just don’t make the most of this opportunity.

Nick Train’s Finsbury Growth and Income (LSE: FGT) has gearing of just 2.4% despite its scale and the manager’s conviction. So investors, managers and boards need to ask if the strategy would work as well in an open-ended structure. For an equity strategy that uses no leverage and invests in liquid stocks, the answer is likely to be yes. If so, there’s no need to operate with the added costs of the investment trust structure. The news that Smithson Investment Trust (LSE: SSON) will convert into an open-ended fund is a good example of this lesson being accepted.

Investment trusts must act soon

The market is slowly getting to grips with these realities. There were five mergers of similar trusts in 2025, with one more planned for early 2026, according to the Association of Investment Companies. Seven trusts and real estate investment trusts (Reits) were privatised – although long-term investors were not happy to see some of them go (eg, BBGI Global Infrastructure). There were 14 liquidations in 2025, the highest number since 2016; one of these, Middlefield Canadian Income, was a conversion to an exchange-traded fund (ETF).

To their credit, some trusts are making changes. There were 40 examples of trusts reducing their fees this year, compared with 32 in 2024 and 26 in 2023. There is more focus on closing discounts, albeit with mixed results. But many need to do more while they still have the chance.

Investors should consider if the trusts they own are worth their place on the market. If they’re not, it may be time to find something better – unless there is a realistic chance of activists forcing a restructuring that could bring windfall gains.

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Our approach is to focus on quality companies, defined as those that have achieved a return on capital persistently above the cost of capital over time. These companies often pay a dividend as a result of the profitability they have generated in cash terms. Seen this way, the dividend is very much an outcome: a marker of the company’s economic productivity, and therefore, we believe, more likely to be sustainable and capable of growing over time.

This approach is distinctive in emerging markets, where it steers us away from the commodities roller-coaster and the cyclical sectors that accompany it, and towards companies with the more consistent, stable financial characteristics that we seek.

Three emerging market stocks to consider

Elite Material (Taipei: 2383) is one of the companies we own with exposure to hardware used in the AI-supply chain. The company is the leading producer of halogen-free copper clad laminate materials used in printed circuit boards, which have applications in IT infrastructure and cloud computing, but also in consumer electronics.

A key attraction of this long-held position is the company's ability to adapt to the changing demand cycle we have seen in information technology over the past five years. Thanks to a dominant position in a product that can be used in numerous applications, the company has been able to benefit from these varying peaks in demand and the current boom in spending on AI servers. Reflecting the recent enthusiasm in the market for AI stocks, the share price has more than doubled over the year to date. The company trades on just over 23 times forecast 2026 earnings.

Yili (Shanghai:600887), China's largest dairy company, produces fresh and Ultra High Temperature milk (representing around two-thirds of revenue), milk powder, and dairy products including yoghurt and cheese. China’s dairy market has been structurally challenged in recent years, but there are early signs that the supply-demand balance is starting to improve, which should ultimately lead to a recovery in milk prices.

Dairy consumption is at relatively low levels, particularly in comparison to developed markets, and we expect this to increase over time as consumer spending rises. At the same time, the company’s leading position across multiple categories and price points gives it a degree of pricing power. These two factors are the twin forces that should provide a strong tailwind. Scale also brings considerable distribution advantages. The company trades on 16 times forecast earnings and the trailing dividend yield is 4.5%. Earnings are expected to grow 10% next year.

Hypera (São Paulo: HYPE3) is a Brazilian consumer-pharmaceuticals group that has acquired a portfolio of market-leading brands in diverse categories such as pain relief, flu remedies and digestive health. The product line also includes dermatology and vitamin supplements.

The company has recently undertaken a programme to reduce excess working capital, a process now largely complete. Although the business is somewhat seasonal owing to the prevalence of cold and flu medicines in the company’s product range, we believe the valuation of the company to be very reasonable given the underlying quality on offer. The stock trades on 14 times forecast earnings and yields 4.7% on a trailing basis.

We aim to build resilient UK equity portfolios that offer both sustainable income and attractive total returns. Our team employs a disciplined, bottom-up approach to stock selection. We focus exclusively on high-quality, well-capitalised UK-listed companies, favouring those with robust balance sheets, strong cash generation and a proven record of reliable dividend payments. Our process is underpinned by considerations including macroeconomic trends.

We construct diversified portfolios of 40 to 60 holdings, aiming for low volatility through an emphasis on large-cap, quality businesses. By maintaining a repeatable, valuation-driven discipline, we strive to avoid value traps and ensure our investors benefit from both sustainable income and capital growth potential. The three stocks below illustrate our commitment to investing in firms that combine financial strength, strategic focus and appealing returns for shareholders.

Three UK blue chips stocks to consider

One of our key holdings is National Grid (LSE: NG), a critical infrastructure provider central to Britain’s energy transition. The company is embarking on a substantial investment programme, with plans to spend £60 billion over the next five years. This capital deployment is aimed at scaling up capacity to meet growing demand for electricity driven by the electrification of transport, heating and industry.

National Grid’s investments also underpin the UK’s shift towards renewable energy, reinforcing its pivotal role in a low-carbon future. With a regulated asset base, long-term earnings visibility and inflation-linked revenues, National Grid offers resilient financial returns and defensive characteristics, making it a core holding for income-focused investors.

Another core position is Unilever (LSE: ULVR), a global leader in the consumer-staples sector. Unilever’s portfolio includes many of the world’s most trusted household brands, ensuring steady demand even in challenging economic environments. The firm’s commitment to innovation and premiumisation has helped it sustain pricing power and foster loyalty from consumers.

Unilever continues to deliver consistent sales growth and improving margins while rewarding shareholders through progressive dividends. In times of market uncertainty, we find Unilever’s defensive qualities and cash generation particularly appealing.

A third significant holding is British American Tobacco (LSE: BATS). Our overweight position in the tobacco sector benefits from high dividend yields; however, our investment thesis for BATS is based on more than just its high yield. The company is actively repositioning itself for the future, investing in next-generation products such as vapour and oral nicotine, which are gaining traction with consumers worldwide.

At current levels, BATS trades at an attractive valuation relative to its earnings and cash-flow potential. In our view, this combination of capital growth prospects, income generation, and strategic repositioning makes BATS a compelling opportunity. While tobacco remains a controversial sector, we believe that the risk/reward profile for BATS is particularly favourable given its financial strength and ongoing transformation.

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The UK renewable energy sector cannot catch a break. At the end of October, the government launched a consultation on changing the Renewables Obligation Certificate (ROC) scheme that subsidises some renewable-energy production. At present, the subsidies are linked to inflation using the retail price index (RPI) measure, but they may now be switched to the consumer price index (CPI). RPI usually rises faster than CPI (the gap varies, but one percentage point is a rough rule of thumb), and so this would mean that subsidies rise more slowly in future.

The government has proposed two options for this. One is to switch to CPI in 2026. The other is backdate the change to 2002 (when ROCs were introduced) by freezing the current price until a new “shadow price” linked to CPI since 2002 catches up with today’s RPI-linked price, and thereafter increase with CPI. Neither are good, but the latter option is clearly worse. Hence shares in listed renewable energy investment funds (REIFs) slumped further, having already been battered by a series of setbacks and problems in recent years.

The changes would have no direct impact on new investments – the ROC schemes closed to most new applications in 2017. However, existing wind and solar farms have been promised subsidy payments until 2037 in some cases, so the changes will affect their earnings. More broadly, making retrospective changes undermines the assumptions on which existing investments have been made. That will erode investors’ confidence in committing future capital.

While the subsidies are ultimately paid by users as part of their energy bill, the change from indexing on RPI to using CPI is likely to mean a minimal reduction in the average household bill. At the same time, it will probably raise the cost of capital for future projects, making it ultimately self-defeating, argue infrastructure funds. Certainly, one has to feel that the government’s Clean Power 2030 (CP30) plan – which assumes £40 billion of private investment a year in green energy between now and 2030 – now seems wildly optimistic.

Losing patience with renewable energy funds

The direct impact of the change on listed REIFs will depend on which option is chosen (and on how much ROCs contribute to their income – typically 40%-50%). For many investors, this may feel like the final straw – yet more evidence that the sector is both unlucky and dysfunctional. While the government is clearly to blame for this particular shock, the way that the REIF sector has developed in recent years hasn’t encouraged investors to give it the benefit of the doubt. One can’t treat all REIFs as exactly the same and I’m going to focus largely on the solar funds here, but many of the problems apply more widely.

Bluefield Solar Income Fund (LSE: BSIF), Foresight Solar Fund (LSE: FSFL) and NextEnergy Solar Fund (LSE: NESF) put out statements saying that the impact on net asset value (NAV) would be around 2%, 1.6% and 2% respectively under option one and 10%, 10.2% and 9% under option two. This sounds manageable. However, we immediately get onto the question of how much investors trust these reported NAVs, which are based on fair value accounting and “mark to model” assumptions. The fact that most REIFs trade on 30%-40% discounts to NAV implies some scepticism about these valuations, while the fact that dividend yields are in the 10%-15% range suggests some concerns about their sustainability.

The original sin in the REIF model is that it was built around being able consistently to issue shares at premiums to NAV to fund new projects. REIFs were marketed as a growing income story in a low-yield world, with the added bonus of a green angle during the economic, social and governance (ESG) boom. Yet they were always paying out cash with one hand while taking it in with the other (hence NESF’s shares outstanding have doubled from 278 million 10 years ago to 555 million currently). This model only worked when the shares traded at a premium to NAV – now that they don’t, the REIFs no longer have access to cheap equity. Debt is no longer cheap either. It might make sense to cut dividends and reinvest the cash, but that would alienate investors who bought for income.

While this explains their growth problem, the opaqueness of returns explains why many investors are wary of them even as a limited-life income asset. In theory, the NAV represents the current value of future expected cash flows. The focus on this – and on paying steady dividends – makes it look as if REIFs have very simple, predictable economics. Reality is more complicated. Projected revenues depend on power price forecasts that come from third-party forecasters. When these change, so do NAVs. Meanwhile, actual performance has plenty of real-world complications.

For solar, there’s the amount of sun that falls on the panels. There’s whether it all gets used or whether grid outages means some gets wasted (FSFL had UK production 8.9% above budget in the first half, but would have been 13% higher without outages). On sunny summer days, there will be points when a surplus of solar power floods the system and sets the marginal price (at extremes the unsubsidised price can even go negative). Hence the “capture price” that solar farms get can sometimes be less the base load price (the price for steady, always-on power) – this summer, capture rates have frequently dropped to 80%. And if the grid physically can’t cope with the power being supplied, producers may be curtailed (turned off) by the system operator, meaning lost revenue.

Since the REIFs’ lenders and shareholders prioritise stability, the managers fix prices for much of their output in advance with power purchase agreements (PPAs). However, this means that they don’t capture much upside from spikes in spot prices (driven by higher gas prices, which set the marginal UK power price most of the time). All these factors come together in a bewildering series of assumptions. To take just one example, NESF’s short-term power price assumptions have fallen 56% from £139 per megawatt hour (MWh) in September 2022 to £61/MWh in September 2025. Longer-term power price assumption has risen 22% over the same three-year period. Yet its 20-year average price forecast has halved since it floated in 2014, pointing to long-term downward pressure.

Can renewable energy funds win back nervous investors?

What is the result of trying to distil such complexity into a single NAV that constantly changes? It is doubt about whether management are trying to mask poor economics with financial engineering, unconsolidated statements, fair value accounting and unverified assumptions. The accounting might technically be correct, but it is opaque and hard to compare between funds. Each time forecasts prove too optimistic and NAVs get downgraded, scepticism grows. This is why the REIFs now trade at huge discounts to NAV. (Policy risk – as demonstrated by the government’s proposed ROC change – may be another factor.)

Most of the REIFs seem to have little idea of how to get investors to trust them. They have tried to address the discount to NAV with share buyback programmes, but these have been too insignificant to counter the wave of selling. What’s more, buybacks often increase leverage: in May this year, NESF had to pause its buyback as leverage would have increased beyond its 50% debt-to-gross asset value policy limit. Rising debt is exactly what nervous investors don’t want to see.

Many have tried to sell assets, which would raise cash to pay down debt and fund buybacks while also validating NAV through real-world selling prices. This process has been slow, suggesting it may be hard to achieve prices respectably close to NAV. For example, in April 2023 NESF said it would sell 246MW of UK subsidy-free solar capacity across five separate projects. At present, there are still two project with 100MW yet to be sold. Last year, FSFL said it would sell its Australian portfolio (170MW across four sites), but the process has now been paused. A small number of bids for the portfolio were received, but none were deemed deliverable. In March this year, it earmarked a further 75MW for sale, with no results so far.

More recently, Bluefield proposed merging with its manager to focus on developing a 1.4GW pipeline of projects. However, that model implied a cut to the dividend and was quickly rejected by shareholders (if they were sceptical about the potential returns on capital, it is not surprising given the sector’s record). The fund was forced to ditch this and put itself up for sale. This has not steadied the decline in the share price, which has fallen to new lows below 70p, with a yield of 13% and a discount to NAV of 39%.

Until now, REIFs that have faced continuation votes have largely won them despite these woes – probably because investors are sceptical that they can sell their assets, pay back the debt and achieve a decent return for shareholders. This detente may be changing as investors get more anxious. The chairs of NESF, FSFL and BSIF have all stepped down in the past year and new brooms may be minded to sweep clean.

We could be reaching the point of maximum pessimism, as seems to have happened with battery funds. I have a position in NESF, bought on the basis that the dividend could well be cut, but that much of the bad news was already in the price with a yield in the mid-teens. Still, if the REIFs’ accounts clearly told us how much cash is being generated per pound invested per MW and whether it is declining, it would be much easier for investors to decide whether they still want to back these “sustainable” investments.

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Some of the best investments are in businesses that operate in relatively unknown but essential markets, working in the background and fulfilling functions that other companies either don’t want to, or can’t afford to do themselves.

One such business is Restore (LSE: RST), the leading provider of physical and digital document-management services in the UK. It stores documents for public- and private-sector organisations, such as the NHS, and destroys old documents. There’s also a document-processing business (called Synertec), which helps companies send electronic and physical communications and a technology division (Restore Technology). All of these help the company’s customers manage their data, whether it’s on paper or in digital form.

Restore is beating expectations

In 2024, Restore generated £275 /million in revenue. The largest proportion of revenue (£170 million) came from the information management division, the one responsible for storing and managing documents. Despite the global shift over the past 20 years away from physical to digital documents, there’s still a vast and steady market for this kind of storage and Restore, as the largest operator in this area, has the economies of scale required to make it work.

The City has raised questions about the sustainability of this business multiple times over the past few decades, yet despite these concerns, the firm has consistently outperformed expectations. It’s helped that Restore has been able to move into new markets, such as operating a “digital mailroom”, which scans and digitises inbound and outbound mail for clients. It also manages exam papers and physical document processes within government agencies.

The second-largest division is a business called “DataShred”. This does exactly what it says on the tin. It’s the largest document-shredding operation in the UK, servicing tens of thousands of companies every year. The third and fourth key divisions are Harrow Green, which helps companies move office, and the technology business. Restore has found that companies moving offices need to digitise and destroy physical records, although they often choose to store old records as well. Despite this, the company agreed this week to sell Harrow Green for £5.5 million in cash to focus on the core business.

Restore's exciting potential

The technology business helps clients manage their tech assets, such as laptops and desktop computers, to ensure security throughout the asset’s life cycle. Some of its biggest clients here are public bodies, such as the Department for Work and Pensions. Restore helps the department set up new laptops, test laptops in use, and erase as well as repurpose laptops when they come to the end of their life. It can process thousands of laptops a day and has a two-week turnaround window to get each computer back into the workforce. Laptops that are not going to be repurposed for new joiners can be securely and responsibly disposed of.

This division currently accounts for just 11% of group revenue, but it has vast potential. Management has highlighted the AI product cycle, the release of Windows 11 and the beginning of the post-Covid technology refresh cycle as structural drivers for growth. The current best practice is for companies to refresh technology every three to five years. Overall, the firm has 500 active customers at present, served by 310 employees, with the capacity to refresh 13,000 assets a week.

The technology business has exciting potential over the coming years, but investors shouldn’t overlook the document side of the organisation. To bulk out this division, in March, Restore paid £33 million to acquire Synertec, which owns a proprietary software platform that helps clients communicate with their customers across different channels. Using the software, clients can upload customers’ communications to Synertec’s systems and select how they want the information to be distributed.

This can include documents printed in braille, for example, or communications sent out via text message. Synertec can turn around the client’s data request overnight, a key selling point for its largest client, the NHS, with which it recently agreed a new four-year framework set to start in the first quarter of next year. Synertec also works with clients such as P&O Ferries, Screwfix and Hotpoint.

A new direction for Restore

Despite its strengths, shares in Restore have declined by around 50% since the pandemic, even as adjusted profit before tax has risen from £23.2 million in 2020 to £34.4 million in 2024. Lack of confidence in the company’s strategy, multiple compression and general apathy among investors towards UK small caps all appear to be to blame.

However, after a change of management two years ago, the City is starting to come around to the growth story. Charles Skinner returned as CEO in 2023, after Charles Bligh, who joined as CEO in 2019, resigned. Skinner stepped down in 2019 following a decade at the helm of the group, during which time the shares returned more than 2,200%. Skinner has spent the past two years refreshing the group and its strategy, but the market is yet to factor in the changes.

According to analysts at Berenberg, the shares are trading one standard deviation below the 10-year average price-earnings (p/e) ratio of around 15; the same is true on an enterprise value to Ebitda basis. Berenberg has the stock trading at a 2026 p/e of 9.9 and a free cash flow yield of 8.3%.

Canaccord Genuity takes a similar view, with a p/e of 10 pencilled in for 2026 and a free cash-flow yield of 8.3%. What’s more, in its latest trading update, Restore reported growth ahead of market expectations, with margins returning above the medium-term 20% target, prompting a wave of analyst growth upgrades. This growth, coupled with a return to the company’s 10-year average valuation, could generate an upside of nearly 70% for the shares in the best-case scenario.

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The way investors view defence stocks is changing. They are shifting from being seen as slow, plodding businesses to being viewed as genuine growth firms. This shift has led to a sharp rise in share prices and has made defence one of the strongest parts of the market over the past three years. The question is whether this enthusiasm is justified and whether the firms that supply military customers can meet these higher expectations.

For many years after the Cold War, investors expected global defence spending to fall. Governments moved away from large standing armies and focused instead on welfare and social programmes. This so-called peace dividend held back the defence industry for decades. That period has now come to an end. Growing geopolitical tension, highlighted by Russia’s continuing aggression and China’s increasing pressure on its neighbours, has forced Western governments to rethink security. This is not a temporary surge in spending, but a lasting commitment to stronger deterrence and modernisation. It means steady demand for equipment and technology, long-term contracts and a sustained period of high activity across the defence supply chain.

The scale of this shift is already visible in public finances. Western governments are putting higher defence spending into law, turning policy goals into binding budget commitments. These plans focus on advanced equipment and long-term readiness, creating a strong investment case for the sector. The renewed need for scale, common standards and faster delivery supports the prospect of dependable long-term growth for companies that provide essential systems and components across air, land and sea.

The geopolitical foundations of rearmament

After the Cold War, the world entered a brief and unusual era. From 1991 onwards, the US was the only superpower and Western political and economic ideas spread rapidly. But this so-called “liberal international order” never truly took root outside the Western alliance. Its foundations were weaker than they seemed – a fact laid bare by the 2008 financial crisis. That crisis shattered trust in established leaders and institutions. The deep recession that followed wiped out wealth and led to years of sluggish growth. Disillusionment with globalisation fed a rise in populism and nationalism, as people began to associate the US-led system with instability and inequality. The dream of a smooth, borderless global economy started to look naïve.

China avoided much of the fallout. Its economy kept expanding and its share of global output jumped from around 6% in 2007 to roughly 20% today. That resilience gave China’s state-driven model new credibility at home and abroad. The collapse of Lehman Brothers showed the limits of US power – and Beijing saw an opening. With the US on the back foot, China grew more assertive and confident on the world stage.

Since then, global divisions have deepened. China has built its own web of influence through economic and political initiatives. The Belt and Road Initiative, once billed as a trade project, has become a strategic tool spanning more than 150 countries. It sits alongside the Global Security Initiative, the Brics group of nations and the Shanghai Cooperation Organisation – all offering partnerships that come without the political strings attached to Western aid and investment.

The US, for its part, has turned inward. Weighed down by inequality and endless overseas commitments, it has scaled back its presence in Europe and the Middle East to focus on the Indo-Pacific. That has forced allies to spend more on defence, creating not greater stability, but a world that is more divided and heavily armed. The rivalry between Washington and Beijing is now about more than power or trade. It is a battle over whose values will define the next world order – one in which nations are prioritising security and resilience over the efficiency that once defined the post-Cold-War age.

The West's arms race

Western nations are shifting their defence strategy, moving from expeditionary operations toward large-scale deterrence against peer rivals. Expeditionary operations involve deploying smaller forces to distant theatres, such as the Nato-led air and naval mission in Libya in 2011 to enforce a no-fly zone. The new focus on large-scale deterrence involves building massive, high-tech capabilities to prevent a major global power from attacking. This is demonstrated by Nato’s Steadfast Defender exercises, which test the rapid movement of tens of thousands of troops across Europe. This change has led to firm, long-term spending commitments across allied nations as they move quickly to close gaps in military capability.

Nato has formalised this shift. The original 2014 Defence Investment Pledge called on members to spend at least 2% of GDP on defence. At the 2025 Nato summit, members agreed to raise that to 3.5% of GDP by 2035. That provides a clear and lasting foundation for the revenue outlook of defence contractors.

In Britain, spending is rising, driven by the nuclear deterrent and the Global Combat Air Programme (GCAP). The UK is overseeing the delivery of Dreadnought nuclear submarines and remains a key partner in the Aukus pact, which will supply Australia with nuclear-powered submarines. These are vast, multi-decade projects that underpin the industrial base of the sector.

Germany has made one of the most dramatic policy reversals. In 2022, it announced a €100 billion special fund for defence. The money is focused on rebuilding land forces after decades of underinvestment. Germany is also working with France on the Main Ground Combat System project, which aims to create a new generation of European battle tanks.

The US continues to lead the world in defence spending. Its budget now targets faster modernisation and production. The army is pushing ahead with its Next Generation Combat Vehicle programme, which includes the new M1E3 Abrams tank. It also dominates the global arms market through the Foreign Military Sales programme, which secures long-term maintenance contracts for platforms such as the F-35 fighter jet.

Japan is another major player. Faced with growing pressure from China, it is investing heavily in modern equipment. Japan is a key industrial partner in GCAP, working with Britain and Italy on a sixth-generation fighter. The country is also developing long-range strike systems, marking a clear shift away from its post-war focus on self-defence.

France remains committed to maintaining a strong and independent defence sector. Its aerospace and naval industries are central to Europe’s strategic base, and it continues to work with Germany on the Main Ground Combat System (MGCS) project. Timelines are long, but these programmes anchor industrial cooperation across the continent.

The defence stocks well placed to benefit

In the last few years, it hasn’t mattered which defence stocks an investor owned, as they nearly all rose strongly. However, future market advantage will belong to companies with the most dependable income. That strength comes from owning generational platforms and providing essential support services.

BAE Systems (LSE: BA) is the cornerstone of the UK defence industry, securing the nation’s nuclear future. The firm boasts a record order backlog of £75.4 billion, more than double what it was 10 years ago. Its largest long-term revenue driver is the naval nuclear franchise, specifically the SSN-Aukus and Dreadnought submarine programmes. BAE is investing significantly in its facilities at Barrow-in-Furness to double capacity, securing production volume for decades. Its acquisition of Ball Aerospace also successfully expanded its already large exposure to the robust US defence market. BAE is a diverse global business that generates only a quarter of its revenue in the UK, with the US making up almost a half. Perhaps its biggest risk is Saudi Arabia, its third most important market, if the country is pulled closer to China’s sphere of influence and is pressured to consider Chinese defence equipment.

Rolls-Royce Holdings (LSE: RR) is roughly one-third exposed to defence and is strategically essential, primarily through its unparalleled expertise in naval nuclear propulsion. Rolls-Royce Submarines supplies the nuclear propulsion plant for the entire UK nuclear submarine fleet and will supply all the nuclear reactors for both the UK and Australia’s new SSN-Aukus submarines. This provides a critical, long-term franchise integral to the UK/US strategic nuclear partnership. Rolls’s defence segment targets a midterm operating margin of 14%-16%, but the division is supported by the massive strength of the civil aerospace division, which recently reported an almost 25% operating margin. This robust commercial cash flow provides the finance needed for the significant capital investments demanded by the Aukus project.

Babcock International Group (LSE: BAB) focuses on long-term support contracts, particularly for marine and nuclear divisions. The firm is the prime contractor for the UK Royal Navy’s Type 31 frigates. More importantly, its Arrowhead 140 frigate design has become a commercial success. The ship has already won export contracts from Poland and Indonesia, providing a major earnings catalyst. The Cavendish Nuclear arm provides highly predictable revenue streams through long-term support and facility-management contracts across UK nuclear licensed sites. This focus on long-duration services minimises the margin volatility associated with high-risk platform development.

Qinetiq Group PLC (LSE: QQ) operates a unique, low-risk model centred on technology and testing services. Its financial future is underpinned by the Long-Term Partnering Agreement with the UK Ministry of Defence, recently extended for another five years to 2033. This £1.5 billion extension covers testing and evaluation for future capabilities, including GCAP and innovative weapons systems. The service-based revenue structure provides predictable earnings.

Following its restructuring, Melrose Industries’s (LSE: MRO) defence exposure lies within its structures division, which supplies airframe components. Defence represents 34% of the US revenue in this segment. Management is working consistently to improve margins, anticipating that the structures division will achieve an operating margin in the low teens by 2029. Melrose, as a key component supplier, is using strong demand and inflation to renegotiate long-term contracts and turn higher volumes into higher profits.

Rheinmetall (Frankfurt: RHM) is an important high-volume defence stock for land defence and ammunition in Europe. The company has reported a surge in defence sales recently, concentrated in vehicle systems and the weapons and ammunition division. Management projects consolidated sales growth of 25%-30% in the 2025 fiscal year, supported by strategic investment to create new capacity across Europe. Rheinmetall’s ammunition division, benefiting from scarcity, is generating very high margins. It is strategically poised to capture a significant share of Nato Europe’s equipment spending.

As the world’s largest defence contractor, Lockheed Martin Corporation (NYSE: LMT) holds massive strategic platform, such as the F-35 and Aegis systems. Its business is structurally dependent on platforms that define the next generation of warfare. However, the firm is susceptible to fixed-price (FFP) contractual risk. This is where the company bears the risk of significant cost overruns. Programme charges are commonplace in defence contracting; in recent quarters, Lockheed Martin has taken significant hits from them. This volatility highlights that, while sales volume is guaranteed, earnings can be uncertain. Despite the increase in business since the start of the Russia-Ukraine war, Lockheed Martin is one of two shares profiled here (along with L3Harris) that have disappointed. Arguably, however, it is one of the cheapest and most diverse ways of gaining exposure to defence trends.

RTX Corporation (formerly Raytheon Technologies, NYSE: RTX) specialises in missile systems, air defence and naval programmes. RTX is benefiting from a depletion in missile stocks as Western-aligned nations support Ukraine. The missiles division has secured major awards for systems such as Amraam and Stinger. Like many defence companies, RTX has non-defence exposure. This comes via its commercial jet engines, Pratt & Whitney, which are a major competitor to Rolls-Royce’s. The stability provided by its commercial aerospace segments acts as a financial buffer, but lowers the net impact of defence spending.

Northrop Grumman Corporation (NYSE: NOC) focuses on strategic deterrence programmes, such as the B-21 Raider bomber and the Sentinel Intercontinental Ballistic Missile (ICBM). Its backlog stands at more than $90 billion and stretches decades into the future. Management expects the acceleration of production to drive significant sales growth. Like Lockheed Martin, Northrop faces FFP execution risks, but is making strategic choices to sacrifice immediate margins on early B-21 production to secure long-term dominance.

General Dynamics Corporation (NYSE: GD) is a diverse firm, with both defence and non-defence segments. It is split into four similar sized divisions: marine systems (submarines); technology (defence information systems); combat systems (land) and aerospace (Gulfstream). The combat systems segment is a primary beneficiary of European land rearmament, securing contracts for the Piranha and Ascod vehicles. The company’s overall operating margin expansion is driven by both defence and the highly profitable Gulfstream private-jet business.

L3Harris Technologies (NYSE: LHX) is a high-tech company specialising in command, control, computers, communications, cyber, intelligence, surveillance, and reconnaissance (C5ISR) and space systems. The firm reported an outstanding book-to-bill ratio, which compares orders received to orders delivered, of 1.5 times, suggesting demand is accelerating. Focusing on high-demand, high-margin technology, and not on older legacy manufacturing, is a priority. This approach aligns with allied budgets that favour integrated, multi-domain operations. The firm was the product of a merger of two rivals in 2019 and the shares have thus far failed to live up to the promise, but the outlook has been improving.

Thales (Paris: HO) provides exposure to technology and digital warfare. A quarter of the business is owned by the French state. It is a complex business that is considered strategically important by the French government. Thales is a technology company as much as a defence business, having made large investments in areas such as cybersecurity, artificial intelligence and quantum technology. Additionally, it produces avionics for aircraft and short-range missile systems.

Understanding the risks

Demand for defence is secure, but it’s not without risks. Fortunately, these are largely offset by long-term contracts and government planning. The first risk involves finances. Western governments face tight budgets. In the UK, the new defence target of 3.5% of GDP is demanding. Ageing populations and high debt levels make this goal tough to maintain. However, long-term contracts ease this concern. Programmes such as Aukus and GCAP last for generations. Governments commit to infrastructure and they sign contracts for development and production that span decades. These agreements ensure steady revenue for contractors, even if budgets face short-term cuts.

The second risk stems from the changing nature of warfare. Conflicts are beginning to focus on drones, cyber threats and technological espionage. Current spending often targets traditional platforms, such as tanks and ships, which may not address new, unconventional threats. However, listed companies benefit from guaranteed spending, regardless of the platform’s effectiveness. Long-term government defence plans secure this funding, protecting UK and Western-aligned firms. The third risk involves public opinion. As governments shift money from welfare to military strength or raise taxes to fund both, public support may weaken. This political challenge could delay or reduce future budgets, affecting defence companies.

Still, there is an extraordinary opportunity here for defence companies that are facing levels of sustained growth not seen for almost 40 years. BAE Systems is the obvious pick for those seeking broad exposure. It is no longer the cheap stock it once was, but it gives pure exposure to defence spending that provides exposure to both UK and US defence spending. It operates across a large number of product types and has secured contracts that could run into decades. For those looking for a cheaper business, Lockheed Martin, the world’s largest defence business, is on a discount to the sector. It requires investors to look beyond the problems caused by the fixed-price contracts, but is the purest way of gaining exposure to the US defence budget.

Babcock gives exposure to long-term support contracts, which are vital in maintaining programmes and facilities. Finally, L3Harris has struggled slightly in recent years from issues created by its merger, but it looks as if its problems are behind it. Should that be the case then earnings growth could come through at a rate even higher than the other defence stocks.

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The scale of private-equity firms has driven them to pursue larger and larger deals. And conditions for these have been getting tougher.

“Across the market, exits are difficult, with many funds full of over-valued assets,” says veteran private-equity investor Jon Moulton. There have been few flotations and listed companies are prioritising share buybacks rather than acquisitions. That leaves other private-equity funds or continuation funds – a fund set up to buy assets from existing funds run by the same firm – as almost the only buyers. Hence returns from large buy-outs have fallen to 10%-12% and investors need to be patient.

By contrast, Moulton – who now invests through his private office to fund medical research – is in a different part of the market. His 40-strong portfolio is invested in deals ranging from “a few hundred thousand pounds to three million at cost”.

It is difficult for most private investors to get exposure to similar opportunities. Wealthy individuals can get access to investment networks, specialist funds or venture capital trusts (VCTs). But these options have high minimum investments, high costs and low liquidity – and recent returns from VCTs (the most visible part of the market) have been poor.

Literacy Capital is offering a surprising discount

However, there is one listed fund investing solely in smaller UK companies. Literacy Capital (LSE: BOOK) was launched in 2017 by Paul Pindar, the former chief executive of Capita, and his son Richard. It was listed in 2021 and now has £312 million of assets. Each year, the trust donates 0.5% of net assets to literacy and education charities – hence the name.

There is plenty more to like about the trust. More than half the shares are owned by the directors (including the Pindars) and the managers. There is no carried interest or performance fees: the management team – other than the Pindars – has the incentive of nearly 600,000 warrants. The annual management fee of 1.5% is relatively low (private equity is very labour-intensive).

The shares have returned 420% since inception in 2017. Yet they now trade at a 27% discount to net asset value (NAV) after a 20% share-price decline over the past year. This is largely a result of recent dull investment performance, with a NAV gain of 2.6% in the 12 months to end September. Nonetheless, sales still grew at 4% for the top-10 holdings, with 9% growth in cash flow. Debt is moderate and holdings are valued at a modest average of 9.5 times cash flow.

Literacy takes both majority or minority stakes in UK businesses that are generating between £1 million and £10 million of cash flow. Typically, these are companies whose founders want to de-risk by releasing equity, some shareholders want to exit, families want to plan for management succession, or where non-core businesses are for sale. Literacy adds value by strengthening management from its connections (more than 45 executives appointed), assisting with bolt-on deals (more than 40 completed) and providing advice.

Literacy Capital's long-term focus

There are 20 positions in the portfolio, with 83% invested in the top 10. The largest holding is RCI Group, a specialist provider of healthcare to the police, custodial and judicial services. It accounts for 30%.

Two new investments and a partial realisation this year have left the portfolio fully invested. “We see multiple new opportunities each day,” says Richard Pindar, but Literacy is in no hurry to sell, and its fee structure is intended to promote a focus on the long term. “Carried interest can encourage managers to sell prematurely.” So the absence of short-term news shouldn’t put investors off – it creates the opportunity for valuation gains and a narrowing of the discount in due course.

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Private credit is not the catchiest topic. Put it alongside AI or bitcoin, and you can see why it doesn’t make so many headlines. Yet there has been a growing stream of stories over the past year or so about the potential risks that could be lurking in the sector, to the point where big names such as Marc Rowan of Apollo apparently feel the need to step up and defend it.

Shares in Blue Owl Capital, which is exposed to some of the main worries that investors have about private credit, have fallen about 30% this year. It has done noticeably worse than private-markets peers such as Apollo or Ares, which are big players in private credit, but have a smaller proportion of their overall business there.

These jitters may be pretty much irrelevant unless you are investing in private credit. I am a little sceptical about it as an investment, but that doesn’t mean that losses will have much impact on other markets. If private credit has indeed taken lending off bank balance sheets – as supporters claim – it could even reduce the consequences of higher defaults.

Private credit's link to the AI boom

Still, investors who remember the global financial crisis will recall the structured finance boom – mortgage-backed securities (MBSs), collateralised debt obligations (CDOs) and an alphabet soup of other vehicles. These were also supposed to redistribute risks and make the system safer. They ended up doing the opposite. That does not mean that private credit is likely to do the same – there are very significant differences between direct lending and structured finance. It only means that investors should be alert to unexpected consequences.

One of the intriguing aspects of private credit is the growing link to the AI boom. Data centres cost a great deal of money and private credit seems to be funding more of it: UBS estimated in August that private credit to the tech sector had risen by $100 billion (or 29%) in 12 months.

For example, Meta Platforms is building a $27 billion data centre in Louisiana, financed by Blue Owl’s funds. The accounting in this deal is intriguing: the liability is mostly off Meta’s balance sheet on the basis that the tech giant only enters into a four-year contract, renewable every four years – even though it provides a “residual value guarantee” to protect bondholders if it doesn’t renew. Still, Meta is probably good for the money. Some of the other data-centre firms will not be if their customers walk away.

Does this mean that an AI bust would ripple through credit markets, spreading the pain more than expected? Who knows. That’s the problem with private markets. It’s hard to see where the risks lie and who might be left holding the bag.

MoneyWeek has launched a new weekly email newsletter called Investing Spotlight. Dan McEvoy – who has written here on AI and other topics in recent months – will discuss the latest news and trends in investing. Sign up to the MoneyWeek newsletter to get it every Friday evening.

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“The true investor… will do better if he forgets about the stock market and pays attention to his dividend returns.” – Benjamin Graham

Dividend income has always been one of the key contributors to equity-market returns, especially in periods of volatility or bear markets. In the 1970s and 2000s, both periods of significant market volatility for the S&P 500, virtually all of the index’s returns came from income, according to data compiled by Bloomberg and Guinness Global Investors. In the 1970s, the index recorded growth of 76.9%, with 17.2 points coming from price appreciation and 59.7 from dividend income. In the 2000s, the index fell by 24.1%, but dividends added 15 points for a total return of -9.1%.

The longer one stays invested, the more critical dividends become. Guinness Global’s data, going back to 1940, reveal that, over rolling one-year periods, the total contribution from dividend income to total return was just 27%, but that number grew to 57% over a rolling 20-year period. They also reveal that $100 invested at the end of 1940, with dividends reinvested, would have been worth approximately $525,000 at the end of 2019, versus $30,000 with dividends paid out. In this period, dividends and dividend reinvestments accounted for 94% of the index’s total return.

The same trend has been observed in the UK. Between 1 January 2000 and 31 December 2019, the FTSE 100 delivered an average annual return of just 0.4%. However, if you include dividends, the index has actually returned 122% over the same period (or 4% a year), according to Schroders’ calculations.

Headwinds for dividend stocks during the pandemic

Still, there’s a reason the figures presented only go up until 2019. Since the pandemic, this relationship has broken down. The latest data from S&P Global show that, since 1926, dividends have contributed about 31% of the total return for the S&P 500, while capital appreciation has contributed 69%. That’s mostly down to the performance of the past five years.

Since the end of 2021, dividend stocks, as defined by the S&P 500 Dividend Aristocrats index – S&P 500 constituents that have followed a policy of increasing dividends every year for at least 25 consecutive years – have produced a total return of just 9% a year compared with 15.6% for the broader S&P 500 index. This decade, dividends have added just 12% to the S&P 500’s total return, the lowest contribution on record, says Hartford Funds.

As Ian Lance, co-manager at the Redwheel and Temple Bar Investment Trust, notes, equity returns have been “driven by a positive re-rating of equities, particularly in the US and particularly in technology stocks”. Dividend stocks were also hit disproportionately hard in the pandemic years. During 2020, $220 billion of dividends were either cut or paused, according to Janus Henderson.

Research by Goldman Sachs found that more than 80% of US dividend exchange-traded funds (ETFs) underperformed the S&P 500 during the 2020 equity drawdown period, and half of them did not bounce back as strongly as the index in the subsequent recovery.

Dividend stocks also “tend not to perform well when interest rates rise”, as Alan Ray, investment trust research analyst at Kepler Partners, notes. “Investors drawn to conservatively managed dividend-paying companies when interest rates were close to zero now find they can buy ‘risk-free’ UK gilts with yields of 4% or 5%, or even just keep cash in a savings account,” says Ray.

When to trust the dividend yield

Despite the headwinds for dividend stocks over the past five years, history shows they can be a safe haven in periods of volatility and uncertainty. What’s more, many income stocks are now trading at relatively undemanding valuations compared with their growth peers, suggesting there’s a bigger margin of safety with these equities in the event of a market downturn.

There’s no official definition of what makes a good income stock, but there’s one thing most of the research on the topic agrees on, and that’s a correlation between yield and quality, or rather the lack of it. While a dividend stock with a high yield might seem attractive as an income play, more often than not the yield is a reflection of traders’ doubt about the sustainability of the payout.

As Martin Connaghan, co-manager of Murray International Trust, notes, “there is no point in being drawn in by a high dividend yield… because that yield is most likely unsustainable and hence false. Stocks that have, on the face of it, very high yields can be vicious value traps if dividends are subsequently cut.”

In fact, research shows that, rather than chasing high yields, investors should instead look to companies offering yields around the 2% to 4% mark. Yield itself should not be used as a gauge of quality. The best way of evaluating the sustainability and quality of a dividend payout is to analyse the quality of cash flows. In business, cash is king. Cash flow gives a good indication of management’s approach to capital allocation.

As Imran Sattar, portfolio manager of the Edinburgh Investment Trust, notes, “For stocks with higher yields it is important to understand the sustainability of that dividend, how much the dividend is covered by earnings and free cash flow, or ongoing capital generation in the case of a bank… and also to think about whether there is anything on the horizon that could change the cash-flow dynamics such as an increased need for investment.”

This view is echoed by Connaghan, who says, “The ability to sustain and grow dividends is essential. Companies with a high cash-conversion ratio, dividend cover and free cash-flow yield should be in a much stronger position to do this.”

Free cash flow is generally defined as the cash flow generated by operations, excluding the costs of running the business and capital expenditures. In a traditional capital allocation framework, if a firm has free cash to spend, it should first reinvest it back into its operations if it can achieve an attractive and sustainable return on investment. If this opportunity is not available, the company should use the money to reduce debt, and if it has no debt, return the money to investors.

Cash flow figures give us a real, unabridged version of what management is doing with a company’s funds. Investors often turn to earnings before interest, tax, depreciation and amortisation (Ebitda) as a proxy for cash flow, as that’s the metric companies usually like to present. However, this ignores essential business costs, such as the replacement of capital equipment, interest on debt and taxes.

Similarly, a simple dividend cover calculation, which generally takes earnings per share divided by the dividend per share, also provides a misleading picture. Earnings per share do not account for all capital expenditure, particularly on long-term assets, which can be extremely costly for capital-intensive companies. When a company pays a dividend, the money leaves the business. That means the capital must be truly surplus to requirements to prevent problems emerging at a later date.

History is littered with companies that have paid out too much during the good times and have struggled with weak balance sheets and a lack of shareholder support in the bad.

The best dividend stocks

The best dividend stocks are those in companies that strike a balance between operational costs, including capital expenditures, and prudent balance-sheet management, along with sensible dividend policies. And they avoid the damaging concept of a “progressive dividend policy”. Progressive policies envisage the dividend rising steadily year after year. They are designed to provide security for investors. In fact, they do the opposite.

Companies always have and always will go through cycles, and making a commitment to increase a dividend year after year, no matter what, forces management into wrong decisions. It’s difficult to cut a dividend when such a policy is in place, which often puts firms in difficult positions, having to pay out more than they can afford.

Some of the most sensible dividend policies are based on small regular payouts, with annual special dividends based on profit throughout the year. This gives more flexibility, allowing management to announce additional distributions as needed without putting undue stress on the balance sheet. Managers can also choose to alternate between dividends and share buybacks, the latter being easier to turn on and off depending on the business environment.

FTSE 100 insurance giant Admiral is an excellent example. Car insurance can be a volatile and unpredictable business. It moves between a hard market when insurance prices are rising and profits are plentiful and a soft market where competition intensifies, prices fall and insurers have to stomach big losses. Managing a business through this cycle requires financial flexibility and a strong balance sheet, so Admiral cannot afford to commit itself to an unsustainable dividend policy. Instead, it commits to distribute 65% of its post-tax profits annually as a regular dividend, supplementing these distributions with special payouts.

For example, for the first half of the year, Admiral declared a regular dividend of 85.9p per share and a special dividend of 29.1p per share, for a total distribution of 115p, or 88% of post-tax profit. This was a pretty hefty interim distribution for the group. In 2021, a bumper year following the pandemic, which forced a change in driving habits and a substantial reduction in accidents, the company’s annual dividend payout reached just under 280p per share. However, in the following years, as drivers returned to the road and started crashing into each other, the company reduced its distribution in line with falling profits. For the 2023 financial year, it paid out just 103p across both its interim and final dividends.

Another example is CME Group. It pays a regular quarterly dividend, equivalent to a yield of about 2% per year. It supplements this with a special distribution at the end of the year based on annual trading performance. Last year, for example, the company paid out four regular dividends of $1.15 per share and one final special dividend for the year of $5.25.

The perils of a regular dividend policy became all too clear in the mining sector back in 2016. That year, commodity prices slumped as China’s previously meteoric growth started to splutter to a halt, leaving mining giants such as BHP, Rio Tinto, Glencore and Anglo American in a difficult position. Not only had these companies made a commitment to hefty, regular, progressive dividends based on past profitability, they had also spent and borrowed heavily to fund growth.

As commodity prices and revenue plunged, something had to give. BHP cut its interim dividend by 75%, the first cut since 1988, and abandoned its progressive dividend policy. Rio also slashed its dividend in half and Glencore was forced into a messy restructuring involving a $2.5 billion cash call, as well as a dividend cut.

In another example, BT had to cut its dividend in 2020 when management realised the company needed to spend more on its fibre build-out to keep up with the competition. This was a big blow for income investors as prior to the cut BT was often touted as one of the UK market’s top income plays.

Where to hunt for dividend income

Sensible capital allocation is a good indicator of dividend quality, as is the overall quality of the business. Quality can be defined in many different ways. Warren Buffett summed it up quite well in his letter to shareholders of Berkshire Hathaway in 1996: “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, 10 and 20 years from now.”

To put it another way, a quality company is one that has a strong competitive advantage and a long runway for growth. A strong competitive advantage also typically translates into higher-than-average profit margins, providing the company with ample cash to invest in marketing, growth and debt repayment, and to return funds to shareholders.

James Harries, co-manager at STS Global Income & Growth Trust, says the best income stocks are “predictable, resilient, high-quality businesses” you can “say something sensible about on a five-,seven- and 10-year view”. That often means sticking with the companies that he describes as “steady as she goes” – they often “grow slower, but [grow] more persistently”.

A great example of the strategy, and a recent addition to the portfolio, is Nike. “It’s the highest quality global sports brand,” notes Harries, and though the company is going through some turbulence, “I’m pretty confident that we’re buying a really high-quality asset at a very attractive valuation”. Nike is one of the best-known and valuable consumer brands in the world, boasts a gross profit margin of more than 40%, and has billions of dollars in net cash on the balance sheet. It’s also rewarding shareholders, with $591 million in dividends in the first half of 2026 and $18 billion returned via share buybacks since June 2022.

The utilities sector can also be a good place to hunt for income. “Often a utility company operates in a regulated sector that is supported by a long-term concession contract, which will stipulate the return that can be generated over the life of the concession,” notes Jacqueline Broers, co-portfolio manager at Utilico Emerging Markets. As a result, cash flows can be more “resilient” and “predictable” than those of other sectors. “All of which translates into a more sustainable long-term dividend payout.”

Broers highlights the example of IndiGrid Infrastructure Trust, which owns 41 power projects comprising 17 operational transmission projects, three greenfield transmission projects, 19 solar generation projects, and battery energy storage (BESS) projects located across 20 states and two union territories in India. The average remaining contract life on the company’s transmission assets is just under 26 years, with contracted revenues underpinning the company’s dividend yield of about 10%.

The other advantage utilities tend to have is the prohibitive replacement cost of their assets. Take UK-based National Grid, which owns the majority of the UK’s high-voltage transmission network, comprising thousands of miles of cables and transmission stations. Building these assets from the ground up would be virtually impossible today, not to mention the vast cost. That gives the company a robust competitive advantage.

Utilities aren’t the only companies that can have such an edge. Connaghan points to the likes of Grupo ASUR, a Mexican-listed airport operator with 16 assets across Central and Latin America. “Its key asset is Cancun airport and the company has seen its passenger numbers increase by a compound annual growth rate of 6% over the last 35 years,” he says. “Such was the financial strength of this business in the earlier part of this year that in April, they announced two 15-peso special dividends in addition to a regular dividend of 50 pesos. This put the stock on a 14% dividend yield.”

The fund manager also highlights the likes of Enbridge, a Canadian pipeline business which transports and stores natural gas and oil through its network, which spans North America. The company has grown its dividend for 30 years in a row. “This type of business is far less exposed to the underlying shifts in the commodity prices themselves, as 98% of its Ebitda comes from assets backed by either regulated returns or take or pay agreements,” he notes.

Investment trusts for dividend income

The structure of an investment trust lends itself to income investing. Not only do they give investors access to a well-diversified portfolio of income stocks, but they can also pay dividends out of both capital and income, unlike ETFs and other open-ended investments. That means trusts are more likely to be able to sustain their dividends in periods of market volatility. Trusts with a global mandate also have far more flexibility in where they can invest so they can pick the best income, quality and growth plays in the world.

JP Morgan Global Growth and Income (LSE: JGGI), Murray International (LSE: MYI), Scottish American (LSE: SAIN) and STS Global Income & Growth (LSE: STS) all have a global mandate. Ecofin Global Utilities and Infrastructure (LSE: EGL) has a global mandate within its utility sector. Others, such as Law Debenture (LSE: LWDB) and Temple Bar (LSE: TMPL), have a UK focus, but with some international holdings.

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Tetragon Financial (LSE: TFGS) is one of the most exotic investment trusts on the London Stock Exchange, with a unique approach both to investing and corporate governance. Its total returns are virtually unmatched, which makes it interesting to review regardless of whether the latter will put one off. Since listing in April 2007, it has produced a total return on a net asset value (NAV) basis of 568%, compared to 276% for the MSCI All Country World index.

Tetragon was originally co-founded by hedge-fund managers Reade Griffith and Paddy Dear to invest in the then-booming collateralised debt obligation (CDO) market. In the aftermath of the global financial crisis, it reinvented its strategy and today invests across a wide range of asset classes. It is far more complex than most vehicles of this kind (which tend to be just a listed feeder fund into a main hedge fund) and so it is simplest to start with a breakdown of the portfolio.

At the end of September, Tetragon had net assets of $3.9 billion, plus about $600 million of debt, resulting in gross assets of just under $4.5 billion. The largest part of the portfolio ($2 billion or 44%) consisted of full- or part-ownership of specialist asset managers through a business called TFG Asset Management. A controlling stake in Equitix, an infrastructure investor, is the single biggest asset, at more than 25% of the entire portfolio.

Equitix was founded in 2007 and Tetragon invested in 2015, since when assets under management have grown tenfold. Tetragon recently sold a 16% stake at a large mark-up to its carrying value. In total, managers owned or co-owned by TFG Asset Management run $41.5 billion in capital. Equitix, BGO (real estate) and LCM (leveraged loans) account for the majority of this sum.

The rest of the portfolio is in a range of different investment strategies: $1.33 billion in private equity and venture capital, $570 million in hedge funds, $310 million in equities and credit, $120 million in real estate, $100 million in bank loans and $60 million in “legal assets” (investments related to litigation finance). Some of this (22% of the total portfolio) is direct investments and some (6%) is in external funds. However, the largest share (31%) is invested in funds run by the same managers that Tetragon owns.

So in essence, Tetragon’s core strategy is to find attractive asset classes, identify managers who deliver strong returns in them, and then invest in the growth of these managers as well investing directly in their strategies.

Tetragon Financial's governance shortfall

If that takes some time to get your head around, so does the governance. Tetragon has a primary listing in Amsterdam and a secondary listing in London, with both dollar-priced and sterling-priced shares. These are non-voting shares and the only voting shares are held by a company controlled by Griffith and Dear, so the founders hold all the cards.

Even though Tetragon owns investment managers, it has an external manager called Tetragon Financial Management, which is also controlled by Griffith and Dear. The fee structure under this arrangement leaves much to be desired: an annual management fee of 1.5% plus a quarterly performance fee of 25% over its hurdle rate (three-month US interest rates plus 2.75%) with no high-water marks.

These shortcomings are probably why Tetragon trades at a persistent discount to NAV (currently 55%). The only mitigating factor is that insider ownership still creates alignment between Tetragon and its shareholders. As of June, more than 38% of the shares were owned by Griffith, Dear and employees. That provides some incentive to achieve the best results for all shareholders.

The shares have returned 385% since inception, which is less than the NAV return (because the discount has widened since it floated), but still very strong. There’s a modest annual dividend of $0.44 per share (yielding 2.3%), but $570m of share buybacks over the past 10 years has reduced the number of shares outstanding by 13%.

This is not an trust that will appeal to most investors. Anybody tempted to buy will need consider it at far greater length than there is space to do here. Still, it is hard to argue with its historic performance.

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“There is a great deal of ruin in a nation,” wrote the economist Adam Smith, meaning that a successful country can withstand a lot of mistakes and incompetence before it is destroyed. He did not, of course, intend it as an open invitation to politicians to try their worst. That point appears to have been lost on every British government of the past decade.

The latest Budget is a deeply dispiriting one: anti-growth, anti-optimism and anti-investing, as Andrew, Kalpana and I discuss on the new MoneyWeek Talks podcast. It goes without saying that there was nothing to alleviate growing fears of long-term economic decline. What felt like a new low was the undermining, for no obvious reason, of things that still work.

The reversal of much of the ISA flexibility brought in just a decade ago. The slashing of tax relief on venture capital trusts at a time when fundraising has been weak. The cap on salary sacrifice for pension contributions. These were accompanied by pointless ideas such as the three-year break from stamp duty for new initial public offerings (IPO), which will do nothing to revive the increasingly moribund London Stock Exchange. All suggest a chancellor and a Treasury who have no clue what they are trying to achieve.

Hidden opportunities in Britain's stock market

Still, the level of pessimism about Britain and the lethargy of the stock market probably increases the extent to which opportunities can keep hiding in plain sight. Take investment trusts. There are several sectors that trade at yawning discounts to net asset value (NAV), including infrastructure, renewable energy, private equity, real estate and various niche strategies. In some cases, these discounts will be justified – reported NAVs will not be realistic and we see this when funds take huge write-downs as they wind down and try to sell assets. Yet in other cases, we see funds carrying out sales near their carrying value or better, which helps to validate NAVs. Overall, there is a substantial amount of mispricing, with not enough investors to do all the hard work.

This situation will not persist indefinitely. Where assets are worth more than their market price, they will be taken out by specialists. These are one-time gains, and the market will shrink as they are snapped up, which is not good for the long-term health of London. But as investors we can only take what chances we are given.

More attention from activists will help speed this process along, so it’s worth taking a look at MIGO Opportunities Trust (LSE: MIGO), one of a handful of funds that invest in other closed-ended funds. Under Charlotte Cuthbertson and Tom Treanor of Asset Value Investors, the trust’s strategy is shifting towards a more concentrated portfolio and greater engagement to unlock value. At £75 million in assets, it can take meaningful positions in small targets and will have limited overlap with AVI Global Trust (LSE: AGT), its £1.3 billion stablemate. This makes it an obvious way to capitalise on some of the market’s blind spots.

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Boarded-up shop fronts and permanently closed department stores have become a common sight across Britain in recent years. As large chains collapse, online retailers gain market share and out-of-town retail parks grow, city centres are at risk of becoming ghost towns. How can the butcher, the baker and even the candlestick maker survive changing thoroughfares?

High streets have been facing years of decline, exacerbated by Covid, as consumers’ confidence struggled amid the cost-of-living crisis, high inflation and high interest rates. This has forced more people to shop for cheaper deals online and on second-hand marketplace platforms such as Vinted and eBay.

“Britain’s high streets are in the middle of a painful reinvention,” says Tom Gray from brand experience agency Imagination. “The 11th-hour rescues of familiar names like Claire’s and Poundland may offer a glimmer of a lifeline, but in reality mark the end of a retail era built on uniformity and convenience.”

There is now a discernible shift towards a “post-stuff era” where “over-consumption, sameness and algorithmic e-commerce have dulled the excitement of discovery”, says Christopher Sanderson from strategic consultancy The Future Laboratory. “Retailers have failed to evolve beyond the ‘sell, sell, sell’ model, and consumers are now seeking emotional connection, cocreation and community.”

These advantages now belong to online retailers, argues Gray. Bricks-and-mortar shops “must offer something digital retail can’t – a sense of experience, emotion and belonging… The retailers that will thrive are reimagining their spaces as cultural and community hubs, not just transactional zones.”

Reimagining the high street as a creative experience

“Retailers must think like curators, not shopkeepers,” adds Sanderson. That involves thinking about retail as a way to connect people. Successful high-street models could focus more on cinemas, museums and pop-up events, transforming traditional shops into exhibition spaces, particularly if they aim to attract teens and 20-somethings, who are leading the charge to revive shopping centres. According to a 2024 report by analytics firm RetailNext, Generation Z (those born between 1997 and 2012) are more than twice as likely to shop in a physical clothing shop each week as the average consumer in Britain (28% versus 13%).

Le Bon Marché department store in Paris has taken a novel approach to retail by staging a theatre after it closes. In London, Victoria Beckham has curated an exhibition of her favourite artists at her eponymous brand’s shop, while LVMH’s Louis Vuitton has turned some of its shops around the globe into immersive art spaces through collaborations with artists such as Yayoi Kusama. The French luxury brand has also built a 30-metre-high shop shaped like a ship called The Louis in Shanghai, with dining and exhibition areas. It has even become a tourist attraction.

Prada-owned Miu Miu has launched several “storyliving” pop-ups, such as the one in Covent Garden last year, where the Italian fashion brand gave away free copies of classic novels by female authors.

“These are not gimmicks,” says Gray, but “blueprints for the future… The next decade will see the high street evolve from a place of purchase to a place of participation where the future won’t be purely commercial; it will also be social, creative and experiential. The winners will be those who see their stores as platforms for brand-building and IRL [in real life] customer engagement where commerce, culture and community overlap.”

Will small high street businesses survive?

Shops are likely to keep disappearing, however – for now, at least. High rents, often the highest cost for small businesses; regulation that has “increased in length and complexity” and can deter refurbishments; and the continued draw of online shopping are still headwinds, says Jean-Baptiste Wautier, an investor and co-founder of the Wautier Family Office.

With these macro trends, it is probable that high streets will continue to shrink in terms of point of sale and only favour big brands, which could hamper local businesses. “Only a major real-estate shock, like a major price drop and major deregulation, could invert this trend,” says Wautier.

Still, it’s hardly all gloom. Even though challenges remain, retail rentals rose 2.3% in the first half of 2025 across all sub-sectors and vacancy rates declined, according to estate agent Knight Frank. Retail investment is also shifting as “prime yields on high street properties have strengthened, and the best spaces are seeing competitive bidding”, says Sophie Levenson from Knight Frank.

The central London estates managed by real-estate investment trust Shaftesbury Capital provide a “glimpse of what all high streets would hope to achieve”, says Danni Hewson, head of financial analysis at AJ Bell. “A carefully curated mix of different stores, from brands to unique retailers that appeal to the local demographic, mixed with a diverse menu of bars, restaurants and cafes. These experiences give people a reason to linger longer, and offices and residential spaces provide consistent footfall. It looks effortless, but every decision is carefully weighed, and every tenant [is] supported to thrive,” she adds.

Still, for all high streets to flourish, government support is crucial, and policy needs to shift from retail preservation to cultural regeneration. “Support should prioritise mixed-use zoning, flexible leasing for pop-ups and independent brands, and incentives for creative, wellness and community-led operators. Recalibrating business rates to reward [their] cultural contribution and [impact on sustainability] would better reflect how high streets now create value,” says Sanderson.

While town planners need to allow spaces to evolve to meet the shifting demands, “for investors, the upside lies in the infrastructure around retail, from tech-enabled platforms and urban logistics to regeneration-led property plays that blend commercial returns with social value”, says Livia Bernadini, CEO of retail technology company Future Platforms.

Still, spending power remains a key component of rejuvenating the high street, as people can’t spend as much as they used to. “Even though salaries went up (partially due to government pressure put on businesses to pay more), it’s completely disproportional to the rising cost of living… In addition, even though minimum wages have been rising”, fiscal drag continues, says Iván Marchena, an economist from broker Just2Trade.

The high street brands likely to thrive

High-street shopping’s future lies not in competing with online retail but in enhancing its offering. The brands that succeed will treat AI not as automation, says Sanderson, “but as augmentation, used as a tool for empathy, intuition and cultural resonance”.

The likes of Next (LSE: NXT), a bellwether for Britain’s retail industry, is a case in point. The clothing and homeware retailer has adapted well to technology and changes in consumption. It leveraged its bricks-and-mortar chain and catalogue infrastructure that included warehouses, delivery networks and consumer data to build a strong online platform that even hosts other brands.

“True omni-channel brands like Next are likely to continue to thrive because they understand how to harness brand, ease of use, availability and tech to their and their shoppers’ advantage,” says Hewson. “Brands that can continue to appeal to their shopper, to either evolve as their shopper ages or shift to appeal to a new shopper, will survive, but they need to have a clear USP [unique selling point] and never lose sight of the day after tomorrow.”

JD Wetherspoon (LSE: JDW), one of Britain’s most popular pub chains, can say it has remained loyal to its brand and customers as a bargain boozer with the same decor and menu in every venue.

Despite grappling with high energy and labour costs, the group posted a 4.5% year-on-year rise in sales to £2.12 billion for fiscal 2025 and plans to open 15 managed pubs and about 15 franchised ones this financial year. It is also planning to expand into mainland Europe for the first time with a pub at Alicante airport in Spain.

Brendan Gulston, co-manager of the WS Gresham House UK Multi Cap Income Fund, sees structural growth in “low-ticket experiential leisure” companies such as Hollywood Bowl (LSE: BOWL), which is “taking wallet share from consumers compared with traditional hospitality segments”. Firms that cater to niche hobbies and enthusiasts, such as Angling Direct (Aim: ANG), Britain’s leading fishing tackle and equipment retailer, are another “strong” area.

Angling, for instance, “benefits from both a loyal customer base as well as an omnichannel proposition”, and “ongoing e-commerce adoption/channel shift is a supportive dynamic for growth”.

Overcoming the doom and gloom

“These companies have delivered strong operating performance despite the broader challenges facing UK consumers, yet the sector as a whole continues to trade at depressed valuations,” Gulston says. “Crucially, their success is not dependent on a rapid recovery in consumer confidence or the macro environment, but if conditions do improve, we believe earnings will gain an additional tailwind – creating the potential for a sharp rebound in share prices and a rerating from current lows.”

Darius McDermott, managing director of FundCalibre, believes the outlook for household spending “isn’t as pessimistic as some might like to think”. Lower inflation coupled with strong income growth could boost households, which would in turn lift UK consumer stocks. “This creates a clear value opportunity as the outlook for consumers gradually improves,” McDermott says.

“Artemis UK Select Fund, one of the standout UK equity funds with a strong long-term record, has more than 20% invested in consumer discretionary stocks,” and counts Marks & Spencer (LSE: MKS) among its top holdings. “VT Tyndall Unconstrained UK Income, which has a bias towards mid caps, shows similar conviction, with almost a quarter of its portfolio in discretionary names.”

For investors looking further down the market-cap scale, McDermott points to the Premier Miton Tellworth UK Smaller Companies Fund, which has allocated 18% to the sector. “With UK retail names heavily domestically focused, small- and mid-cap funds, in particular, can provide an effective way to tap into the recovery story,” he adds.

Reports of the death of the high street appear exaggerated. As thoroughfares become more omnichannel and experience-led, high streets are set to remain vital hubs for shopping, communities and local culture. They will still, however, require a benign consumer economy to thrive.

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Listed real estate investment trusts (REITs) are starting to get their mojo back. Nowhere is this more apparent than in the office sector. In the immediate years following the pandemic, office values across the UK struggled as investors tried to grapple with the future of work and the implications for office buildings. However, over the past 24 months, the return to offices has accelerated and supply is struggling to keep pace with demand.

Total returns – ie, including rents and valuation – for the UK office sector were 2.7% in 2024, according to real-estate firm CBRE. That lags the overall return for UK commercial property at 7.7%, but there are growing signs of momentum. Take-up of office space across the UK reached 20.3 million square feet in the second quarter of 2025, the highest rolling 12-month level since the third quarter of 2022.

Market dynamics suggest some level of hoarding. Between 2019 and 2024, the number of people employed in office jobs is estimated to have increased by 2.4%, while occupied office space has decreased by 1.3%. Space per person has fallen by around 20%. To restore office space to 2019 levels, companies in London would have to acquire 39 million sq ft more space, reckons CBRE.

To put that into perspective, 1 Undershaft – currently the largest office tower under construction in the City of London – will provide just 1.7 million sq ft of office space across 73 floors.

The lack of space, coupled with a growing desire for remote working, means there’s a rising demand for flexible workspaces. Demand for this space has surpassed pre-Covid levels by more than 200%, according to Savills. This market was dominated by the likes of Regus (part of IWG) until WeWork disrupted the market. WeWork’s model failed, but it’s left a lasting legacy. A fifth of London’s offices are expected to be co-working sites by as early as 2030, according to CBRE.

Workspace's new strategy is working

This brings us to Workspace (LSE: WKP), whose portfolio comprises approximately 4.2 million sq ft of flexible work space in more than 60 properties in London and the South East, renting to over 4,000 customers. The group was founded in 1987, grew through acquisitions, and nearly collapsed due to excessive debt during the 2008 financial crisis. However, the near-death experience taught the company a valuable lesson: do not underestimate the value of having unleveraged freehold property (something WeWork overlooked). Workspaces’s loan-to-value (LTV) ratio is around 35% and is projected to fall to 30% by the end of the decade, according to Berenberg.

The share price took a hit last week when it said that uncertainty around the Budget has led businesses to delay leasing decisions – a theme echoed by other REITs – as well as reporting a first-half loss on the basis of falling valuations. Occupancy at the end of September was close to 80%, which is the crunch point for the group. Historically, rents have started to come under pressure at this level.

However, Workspace is now implementing a “fix, accelerate and scale” strategy under Lawrence Hutchings, the new CEO who joined from Capital & Regional in November 2024. The overarching goal of the new strategy is to sell underperforming assets, upgrade existing assets, keep leverage low and return cash to investors. Last quarter, the group completed £52.4 million of disposals against a £200 million target, at an aggregate discount of 1.6% to recorded value. Berenberg forecasts Workspace will have net tangible asset value (NTAV) of 754p per share for the 2026 fiscal year, suggesting the REIT is trading at a near-50% discount to the value of its property given the current share price of 362p.

This appears unwarranted. The fundamentals of the office market, particularly in and around London, remain robust, and Workspace has laid out a clear strategy to unlock value.

Workspace Group debt

Still, one cloud hanging over the group is the cost of debt. REITs are required to distribute 90% of their net property rental income to shareholders to maintain their Reit tax benefits. That can put pressure on cash flow if other costs, such as capital expenditure (capex) and interest charges, rise. More than one Reit has fallen foul of these restrictions in the past and has either been forced to borrow more or sell assets to fill the gap.

Workspace has 82% of its debt on fixed or hedged rates, with the average interest rate on this being 3.3%. However, 75% of Workspace’s fixed-rate debt is set to mature in the next three years. There’s only one other REIT (New River REIT) that has a higher volume of debt maturities over the same period. As debt is likely to be refinanced at higher rates, the cost of financing is expected to increase by nearly 30% by the end of the decade.

Still, rental income growth is expected to offset most of this growth, with interest coverage falling to a low of 2.6 times in 2028 before rising to 2.8 times in 2029. Disposals will cover most of the cost of refurbishing old assets and additional capex, meaning debt shouldn’t increase materially from current levels. So the changes shouldn’t force a material change to the strategy.

That would be good news for Workspace’s dividend. The stock currently yields just shy of 8%, which is one of the most attractive yields in the UK Reit sector. So Workspace has all the hallmarks of a traditional value play. It’s trading at a near 50% discount to the value of its underlying assets, offers a market-beating dividend yield and is suffering from cyclical, not structural headwinds.

There’s little to no financing risk. In the worst-case scenario, the balance sheet is full of freehold property. As the REIT works through its near-term issues, there’s scope for decent upside from current levels. Investors will be paid to wait.

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You can’t blame BHP for having another crack at buying Anglo American, but its decision to walk away again so quickly raises big questions. It is widely acknowledged that there is a looming supply shortfall for copper, the metal at the heart both of a putative BHP-Anglo deal and of the much better Anglo-Teck Resources merger that investors prefer. Yet BHP and its peers remain reluctant to put up serious money to solve that.

The copper bull case is simple. The world is using more electricity: it is replacing fossil fuels (eg, electric cars), it is meeting new demand (eg, emerging markets) and – at the margin – it is critical to new technologies (eg, data centres are a small but fast-growing share of consumption).

In total, electricity will grow from 21% of final energy demand now to more than 50% by 2050 in some scenarios, reckons the International Energy Agency. This implies a lot of copper for wires and other components – generators, transmission cables, vehicles, appliances, in buildings, in networks and so on.

Can copper supply keep up with rising demand?

Copper supply is not on track to keep up with this. Total demand will grow by roughly 24% to almost 43 million tonnes per annum (mtpa) by 2035, reckon analysts at Wood Mackenzie. Meeting it will require eight mtpa of new mined supply and 3.5 mtpa of additional scrap supply. There is no shortage of copper reserves around the world to mine, although ore grades have been dropping over the long term (this means more rock must be mined to produce the same amount of metal, pushing up costs). However, there has been a lack of investment in major new mines. Meeting demand will now take over $210 billion in investment, says Wood Mackenzie. This is a huge increase from the $76 billion invested in the past six years, and about half of that came from Chinese miners, which adds a further wrinkle. Securing copper supplies may become a geopolitical imperative.

There may already be hints of tightness in the market, with prices reaching record highs. Steady demand growth has combined with supply disruptions at mines in Chile, the Democratic Republic of Congo and Indonesia to create a probable mined supply deficit by next year. However, there are other factors at play as well. The threat of tariffs on refined copper imports pushed US prices to a premium, causing metal to be stockpiled there and shrinking stocks elsewhere in the world. If demand forecasts are correct, the fundamental crunch is yet to come.

Some substitution is possible. Aluminium has lower conductivity and is less durable, but works well for some power applications. Fibre-optic cable has replaced copper for data transmission. More speculatively, carbon nanotubes may eventually offer another alternative. Still, for the most part, copper will be crucial for the foreseeable future. A basket of some of the most pure-play copper miners – eg, Anglo-Teck, Freeport McMoRan, First Quantum Minerals, Antofagasta, Southern Cooper – is one of the most compelling ideas in natural resources.

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The strategy employed by Temple Bar is known as value investing. This is the process of buying a company’s stock for less than its true worth, or intrinsic value. By buying at a discount, this strategy builds in a “margin of safety”: while in the short term an undervalued company’s share price might fall further, in the long run the built-in value should ultimately be recognised by other investors, prompting the share price to rise to reflect the stock’s intrinsic value. There is much empirical evidence to show that value strategies have outperformed stock markets over the longer term.

Of course, some companies are cheap for a good reason, but we believe investments in good-quality yet undervalued companies with strong cash flows and robust balance sheets offer the best potential for attractive long-term investment returns.

Three British stocks worth adding to your portfolio

Although Aberdeen Group (LSE: ABDN) has been known as an asset manager for many years, the company has in fact managed to diversify and now operates three different businesses: Investments asset management; Adviser, a business-to-business (B2B) division; and interactive investor (ii), a trading platform for consumers. Aberdeen’s B2B business is the UK’s second-largest platform offering advice, measured by assets under management; and ii is the UK’s second-largest direct-to-consumer investment platform.

The group appointed a new CEO in 2024 to help make the firm more profitable. We estimate that a restructured Investments business within Aberdeen could be worth an additional £1.5 billion, and therefore see a potential restructuring as a free call option embedded in today’s valuation. There are also financial assets worth £2.1 billion on the balance sheet. Combining our estimated intrinsic value of the three businesses with these financial assets, we deem the shares significantly undervalued.

Smith & Nephew (LSE: SN) is a medical-devices business. It has struggled for some time, losing market share in its key orthopaedics business and suffering from poor levels of productivity. There is now a 12-point plan in place to drive financial improvement. If successful, it could lead to higher sales growth, productivity improvements, expanding margins, and higher cash flow and shareholder returns. In the last 18 months, there have been clear signs that the turnaround is working, as the company has delivered annual sales growth of more than 5% and an expansion in margins. We believe that Smith & Nephew is a high-quality business with strong market positions in relatively stable but growing markets, and we expect meaningful growth in profits in the medium term.

Johnson Matthey (LSE: JMAT) is a speciality chemicals business. JMAT has historically delivered a stable level of sales and underlying operating profit. In recent years this consistency has been impeded by investments in hydrogen. Concerns around hydrogen, a decline in prices of platinum-group metals and the transition to electric vehicles have led to a derating in the stock. Management have since recognised the risk of pursuing growth in unproven technologies and have shifted their focus toward maximising cash flows and shareholders’ returns.

At the time of its results in May, JMAT announced the sale of its Catalyst Technologies division for £1.6 billion and an intention to return 90% of the proceeds to shareholders. This division accounts for just 25% of the company’s profits and yet the sale’s proceeds made up two-thirds of its market value at the time of the announcement. The shares responded favourably on this news. We believe that the shares remain significantly undervalued.

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The British banking sector is in rude health. Perhaps the most symbolic moment this year, in the late spring, was the return of NatWest to full private-sector ownership. The government, which at one stage owned 84% of the troubled lender, sold a final tranche of shares. However, while NatWest’s shares have continued to do well, it isn’t the most interesting UK bank on the stock market at present. I think you should consider a punt on its rival, Barclays (LSE: BARC), instead.

Despite being one of the few UK banks that wasn’t directly bailed out by the government in 2008, Barclays has faced criticism for the poor performance of its investment-banking division. In recent years there has even been pressure from activist investors to sell, spin out, or otherwise separate the investment-banking side from the retail-banking business. Nevertheless, CEO C.S. Venkatakrishnan (Venkat) has stuck with a hybrid strategy of keeping the investment bank while trying to build up the retail-banking and wealth-management arms.

Soaring profits for Barclays

So far, this strategy appears to be working well, with Barclays’ revenues and profits continuing to increase. Its stated profits are now 125% higher than they were in 2019, and even after adjustments they are still up by two-thirds. Dividends have more than doubled. True, there are some clouds on the horizon, in terms of ongoing litigation over the departure of disgraced boss Jes Staley, exposure to private-credit loan portfolios and possible banking taxes in the upcoming Budget. However, experts believe that the first is a relatively minor problem, while Barclays is well-placed compared with its rivals.

One big reason to be bullish on Barclays is its valuation. The stock trades at less than eight times estimated 2026 earnings; at a discount of more than a quarter to the value of its net assets; and at a smaller discount to its tangible book value. This makes it cheap, both in absolute terms and relative to its rivals, with NatWest trading at a 2026 price/earnings (p/e) ratio of 8.5, while Lloyds and HSBC both sell for 2026 p/es of 9.5. All three of these banks are priced at significant premia to net assets. The major US investment banks are valued even more highly.

Barclays’ improving fortunes have certainly caught the imagination of investors: the share price has been on a roll. It has risen by nearly a third over the last six months, making it one of the best performers in the FTSE 100 during this period. It has continued to beat the blue-chip index over the past month and three months, and is also trading above both its 50 and 200-day moving averages. As a result, I would suggest going long at the current price of 405p at £9 per 1p per share. In that case, I would put the stop-loss at 300p, which gives you a total downside of £945.

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At the heart of the global financial markets are the exchanges, such as the London Stock Exchange, the New York Stock Exchange, and the Nasdaq. The function they fulfil in the market is straightforward, yet vital. Exchanges match buyers and sellers and publish the data on the trades. They’re also responsible for bringing assets to market, which can range from shares in public companies to contracts on commodities and interest rates. Most exchanges don’t own the companies that are listed – they only facilitate buying and selling by market participants and take a cut for the privilege.

The CME Group (Nasdaq: CME) is a little different. It is the largest futures and options exchange in the world and, unlike other exchanges, it owns the futures contracts traded on its platforms. These range from the E-Mini S&P 500 contract to interest-rate futures, crude oil, cattle and even bitcoin. For example, more than one million contracts of WTI oil futures and options trade daily, with approximately four million contracts of open interest on the exchange. In this case, one contract is equivalent to 1,000 barrels of oil. The most liquid contract on the exchange, and indeed in the world, is the Three-Month SOFR Futures contract, used for hedging interest-rate exposure.

CME Group has long-term potential

The CME Group’s edge lies in its market position. Liquidity begets liquidity – the more traders there are in the market, the easier and cheaper it is to buy and sell. Along with the advantage of scale, the CME Group’s position in the market for debt futures means it’s well-positioned to capitalise on ballooning government deficits around the world.

Where the company lacks exposure, however, is in the equity futures market. Of all the major exchanges, it has one of the lowest levels of exposure to equity markets. Overall, 18% of revenue in 2024 came from equity contracts, compared with 27% for interest rates, 13% for energy and 10% for agricultural commodities.

The company’s growth over the past five years provides a good indication of its long-term potential. The number of contracts traded across its platforms has jumped from around 18 million a day on average in the first quarter of 2019 to around 30 million. Meanwhile, the revenue per contract has steadily increased. In equities, revenue per contract is expected to rise from $0.529 in 2022 to $0.635 in 2026, according to UBS’s estimates. The overall group average revenue per contract is expected to have risen from $0.643 to $0.689 by 2026.

That might not seem like much on a contract-by-contract basis, but when CME facilitates the trade of 30 million contracts a day, revenue of $0.689 per deal adds up. The group’s Ebitda margin has risen from 67.4% to 70.3% since 2022.

Trading is just part of its offering. CME Group also sells market data. This is becoming an increasingly important part of all global exchanges. LSEG, which owns the London Stock Exchange, generates only 3% of its revenue from trading. A total of 12% of the CME Group’s revenue comes from the sale of data, which is generally far more profitable than trading activity. In the third quarter, CME’s revenue from market data reached a record high, up 14% due to expanding demand, particularly in the Asia-Pacific and Europe, the Middle East, and Africa regions.

CME Group expansion

Steady, but profitable growth has been the name of the game for CME. However, it’s now capitalising on two trends to accelerate expansion. The first is crypto. The group has launched a range of crypto contracts and in the third quarter it facilitated the trading of 340,000 contracts per day, up by more than 225% year-on-year. The group plans to accelerate this growth with the introduction of 24-hour trading.

The second is increased trading in the retail sector. Retail investors have surged into the US futures and options markets since the pandemic, aided by trading apps and easy leverage. Management is leaning into this expanding market. It recently signed an agreement with sports-betting platform FanDuel, which will provide access to approximately 13 million potential new retail accounts.

The exchange has also launched products to facilitate trading in smaller volumes, such as one-ounce gold futures as well as more flexible products, such as weekly agricultural options. As well as these levers, the group is also a leader in AI and machine learning. It’s been using AI to launch new products and reduce settlement and trading times, as well as administration.

CME Group's income kicker

With multiple routes to growth over the coming years, CME Group has all the hallmarks of a growth play. But unusually for US growth stocks, it also has an income kicker. The group pays a regular dividend, supplemented by special dividends. Last year, it paid out $10.80 per share and this year it’s paid out four regular quarterly dividends totalling $5 per share, with the final special dividend yet to be announced (last year, the final payout was $5.80). It’s not inconceivable that the total dividend in 2025 could exceed $11 per share, a yield of 4%. With net cash on the balance sheet (net of regulatory assets) and an Ebitda ratio in the 70s, CME has the capacity to maintain this payout.

Based on the current growth trajectory, analysts at UBS have the stock trading at about 19 times 2029 earnings. That’s not demanding at all for a business that’s consistently registered steady, high-margin growth and has a record of returning cash to investors. CME appears to be an attractive hedge against market volatility and uncertainty with an added growth bonus in the form of its exposure to crypto contracts.

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Our annual conference, which this year coincided with the magazine’s 25th birthday, was a roaring success. For those who weren’t there, here is an overview of what you missed. Andrew opened proceedings by noting that the magazine’s quarter-century was bookended by two huge technology booms, while the years in between had seen extraordinary events ranging from a financial crisis to a pandemic.

The only thing it hadn’t seen was a normal business cycle, thanks to constant interference in economic cycles and economies by central banks. Calderwood Capital’s Dylan Grice underlined how state meddling was a recurrent theme – well-intentioned efforts to regulate the market only deepened the crises leading to the American and French revolutions. Throw in today’s geopolitical, technological and financial uncertainty, and extreme caution is called for.

Diversify as follows, he says: construct an equally weighted portfolio comprising equities, commodities, precious metals, real bonds, nominal bonds and securities offering exposure to insurance and reinsurance, such as CAT bonds.

The panel following Dylan’s speech, hosted by MoneyWeek’s columnist Rupert Hargreaves of City A.M. and consisting of Jasmine Yeo of Ruffer, Troy Asset Management’s Charlotte Yonge, RIT Capital Partners’ Frank Ducomble and Charlie Morris of ByteTree, highlighted the scope for gold, bitcoin and index-linked bonds to shield investors’ holdings. Charlie said he was convinced that AI is a massive bubble that peaked in late October.

MoneyWeek Wealth Summit highlights

The emphasis then switched to long-term growth opportunities. Enter Vietnam, which has been one of our favourite stock markets since 2005. Dominic Scriven of Dragon Capital says the economy is growing at 7%-8% a year. Exports have moved up the value chain from raw materials to electronics, and consumption is rising. The pro-business Communist government is sacking one million civil servants to make the public sector more efficient.

Japan, meanwhile, is making its private sector more efficient. Nicola Takada Wood of AVI reviewed the progress of the campaign to shake up corporate governance and unlock value. AVI has been a key activist investor in the under-researched small-cap segment of the market. There is still room for improvement – a large majority of the firms trading below book value in the market are small caps.

Ben James of Baillie Gifford focused on AI. It is the latest technological revolution in a series that began with the industrial revolution, the last one being information technology. We are in the early phase of the machine era, and a key theme will be robotics, with robots doing manual tasks everywhere. In this context, Aurora, an unmanned truck group, and Tesla’s robots have caught Baillie Gifford’s eye.

Next we heard from India Capital Growth Fund’s Gaurav Narain. India continues to exhibit robust growth of about 6% a year, powered by a young population’s household spending – the median age is 28. The stock market remains buoyant, too, accounting for a third of flotations worldwide.

A lunchtime discussion about gold was led by Cris Heaton, who quizzed James Proudlock of OptionsDesk and Erik Norland of CME Group. A snap poll of the audience afterwards was bullish.

After lunch, our founding editor, Merryn Somerset Webb, now at Bloomberg, reviewed the lessons of MoneyWeek’s 25 years. Two of them were that diversification and mean reversion always matter. And hold gold.

Then Laura Foll of Janus Henderson explored the perennial problem of the British stockmarket withering away, with former MoneyWeek editor John Stepek, also now at Bloomberg. The market’s overall valuation is in line with its long-term average, while small and mid caps still look cheap. Foll highlighted commercial property as an area unlikely to become obsolete as technological advances gather pace.

Diana Choyleva of Enodo Economics has become more positive on China in the past few years. There is scope for a bull market now that the government is trying to encourage people to hold stocks rather than property. Pantheon International’s Charlotte Morris reminded the audience that privately held companies outnumber listed companies threefold, so it is important to have exposure to private equity. The same goes for healthcare, according to James Douglas of Polar Capital. The pace of innovation remains impressive and demand robust – concern over the Trump administration’s capricious health policies has eased and valuations are appealing.

The afternoon panel, focusing on diversifying beyond the US and its AI-driven tech stocks, along with the relative merits of small and large caps, was hosted by MoneyWeek’s columnist David C. Stevenson. David was joined by Martin Connaghan of the Murray International Trust, Simon Barnard of the Smithson Investment Trust and Swathi Seshadri of MCP Emerging Markets. Value lies beyond the US, while Simon Barnard noted that the AI boom may be like the railroad one – more useful to future users than the original investors.

Following Dr Pippa Malmgren’s riveting explanation of how stablecoins could remodel the global financial order, MoneyWeek’s funds columnist, Max King, finished the conference by reminding readers to stay optimistic and recall that sometimes value stocks were cheap for a reason. The FTSE 100 should soon reach 10,000, he said. This week, it is tantalisingly close.

Thank you to our headline partner Aberdeen, event partners India Capital Growth Fund, OptionsDesk, Polar Capital, QuotedData, RIT Capital Partners, Smithson Investment Trust and Vietnam Enterprise Investments; and association partner The Association of Investment Companies for their support.

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Simon Wolfson is widely regarded as the most able CEO of any FTSE-100 company. He joined Next, of which his father was then chairman, in 1991, was appointed to the board in 1997 at the age of 30 and took the top job in 2001. Next had been founded as a mid-market fashion retailer in 1981, but over-expanded and nearly went bust in 1988. Under Wolfson, it has expanded internationally, acquired other brands and gained a market value of £18 billion. He is well worth listening to.

When asked which business book he’d recommend, he replies, “Just one. Bill Slim’s Defeat into Victory”. This is the book, first published in 1956, by Field-Marshal William Slim about how he led the British 14th Army in the retreat through Burma in 1942; in the defence of India against a determined attack in 1944; and in the subsequent rout of the Japanese forces in Burma by June 1945. This was despite extraordinarily difficult terrain; being outnumbered, under-equipped and undersupplied; and the ferocity of Japanese defence. What lessons does this book hold for business managers 80 years later, and how did Wolfson apply them to Next?

Slim’s senior commanders were all people who he had got to know and trust years before, to whom he could delegate tasks with confidence. Similarly, Wolfson promotes internally, rather than recruiting from outside; 28 of his top 30 managers were promoted and have been at Next for a combined 500 years.

Slim displays a determination to get on with, even like, notoriously difficult people on the same side. These included “Vinegar Joe” Stilwell, the American in command of Allied forces who served as Chiang Kai-Shek’s chief of staff; Orde Wingate, commander of the Chindits commandos, who did not regard Slim as his commanding officer; and Aung San, the Burmese nationalist leader. He also cultivated strong relations with the Americans, with the RAF and with Louis Mountbatten, the Allied commander in the Far East. The lesson for Wolfson? Learn not just to get on with, but also to respect and like the people you need in order to be successful.

Simon Wolfson's leadership style

Morale was critical to Slim’s success. “I made a point of speaking myself to every combatant unit, or at least to its officers... whether British, Indian, Gurkha or African. My platform was usually the bonnet of my jeep with the men collected around it and I often did three or four of these stump speeches in a day.” Wolfson too makes a point of visiting outlets, distribution warehouses, design centres and offices as often as possible.

Slim had an overarching strategy, but was prepared to be flexible if circumstances and dispositions changed. In fact, he regarded Japanese inflexibility as a key weakness, meaning that they would be thrown into confusion if the 14th Army did not respond as expected. Likewise, Wolfson emphasises his scepticism about an inflexible long-term strategy and the importance of being able to respond to changing circumstances. Hence, the acquisition of other brands such as Joules and Cath Kidston and expansion overseas when technology made it economic to do so.

Slim was very willing to acknowledge failure and recognise mistakes. He regarded it as important to learn lessons and move on; “the lessons from defeat are more than from victory. A defeated general will turn in upon himself and question the very foundations of his leadership, but if he is to command again, he must shake off these regrets as they claw at his will and self-confidence”. Wolfson is never publicly flustered and always willing to admit to setbacks.

He admires Slim for his willingness to retreat, as he did before the Japanese offensive in 1944, rather than stubbornly defend a poor position. The result was a mixture of caution and boldness: “when in doubt about two courses of action, a general should choose the bolder”, he writes. A CEO should too.

Wolfson probably hasn’t had to improvise to overcome shortages in the way Slim did: he had river craft built, roads constructed and even parachutes made out of jute to overcome the lack of silk and special cloth. Supply problems were a challenge to be overcome, not an excuse for inaction. Wolfson can probably supply comparable anecdotes. Like Slim, he sets great store by intelligence; in Burma, it was a question of the location and condition of Japanese troops; for Wolfson it is gauging how the market is developing and changing.

But the most important aspect both leaders share is their regard for the importance of logistics. For Slim, this was the supply of food, fuel and ammunition, maintenance of vehicles and treatment and evacuation of the wounded. Much of the logistics in 1944-1945 was airborne, which meant control of the skies, building forward airfields and the accumulation and distribution of stores. The inadequacy of their logistics was why Japanese casualties were so much higher.

For Wolfson, logistics means managing supply chains, the distributions to stores, handling of returns and integration of service all along the chain. You might think that wars are won on the battlefield and retail success at the point of sale, but without good logistics, generals and retail CEOs fail. Slim focused on the whole army, not just the frontline troops. “Everyone in the army had to be made to see where his task fitted into the whole”. The same applies in any business.

Slim combines intense regard, liking and loyalty towards those on his side with disdainful ruthlessness towards the Japanese. Perhaps Wolfson has a similar attitude to those who cross him in business, but any potential enemies would be well advised not to find out.

After the war, Slim went on to become chief of the Imperial General Staff and governor-general of Australia. He was a highly regarded lecturer on leadership and died in 1970. If Wolfson ever writes a management book, it too will be well worth reading.

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