Twelve months ago, 85% of economists and market analysts expected the US and global economy to fall into a recession and investors were voting with their feet – equity fund outflows in 2023 ended up being both protracted and significant.

Yet a recession did not transpire and equity markets delivered a decent set of positive returns for investors, especially in the US.

Today, the market is leaning more towards an expectation of lower inflation, no recession and significant interest rate cuts. This is a goldilocks-like scenario that is far from guaranteed, and there are early signs already in 2024 that investors may be stepping back from this narrative.

Documenting a market outlook is always a humbling experience and we don’t claim to hold a crystal ball in our market assessments. The experiences of 2023 are a good example how difficult it is to make precise macro forecasts.

See also: Baroness Dambisa Moyo: Why traditional multi-asset portfolios may lose their shine

The investment arena may appear daunting given these macro-economic uncertainties, but we are seeing many exciting investment opportunities which warrant capital in a multi-asset portfolio. Within equities, overall market multiples appear reasonable – running not too hot, and not too cold – with all major countries better placed than they were a few years ago from a valuation standpoint.

US equities should continue to play an important role in portfolios, although the concentrated rise in the Magnificent Seven has created opportunities to add selected value, which looks especially interesting in smaller, value-oriented companies.

One long-term risk is the lack of earnings growth. Last year we saw stock prices rising in the United States due to multiple expansion, rather than due to earnings uplifts.

One potential reason for the expansion of multiples this year was a belief that central banks would quickly and aggressively pivot to rate cuts. However, markets are currently pricing in five interest rate cuts in 2024, which appears quite optimistic to us.

Financial services, squarely a cyclical value-leaning sector, leaps out as inexpensive with low expectations. Rising rates and the 2023 US banking crisis led the sector to underperform. We believe much of the risk here has been discounted and that US banks are worth a look.

Outside of the US, the broad opportunity in emerging markets has grown more significant during 2023 as those stocks have lagged their developed-market peers.

Much of the performance drag can be attributed to Chinese stocks as investors weighed looming geopolitical and secular growth concerns. The aggregate sentiment toward emerging markets remains bearish in absolute (compared with its own history) and relative terms (compared with developed markets). As a result, we are happy to allocate capital to emerging markets, with a focus on Asia.

See also: Head to head: Will the year of the dragon herald better times for China?

Fixed income is perhaps even more interesting than equities given the level of starting yields – which historically are highly correlated with returns – are near the highest levels since the global financial crisis. Real yields also remain elevated as inflation continues to abate.

An interesting feature of the yield curve is that the inversion remains pronounced and therefore yields on short-dated bonds exceed those of long-dated debt.

For investors with a more cautious mindset or shorter time horizon, we see short-dated bonds having appeal. However, if we do see inflation risks continue to recede, it may not be possible to lock in today’s long-term rates in the future. For investors with longer horizons, we would suggest exposure across the maturity profile and our portfolios’ duration is longer than it has been for many years.

We believe there is no need to stretch for yield. We prefer investment grade risk to high yield, with the latter offering investors relatively tight credit spreads when compared to historical averages. Corporate fundamentals look solid, and near-term refinancing risk is low, but we prefer allocating risk to other parts of the investment universe.

Mark Preskett is senior portfolio manager at Morningstar

This article was written for our sister title Portfolio Adviser

The six sectors represent around £263bn of assets, as at end of June, or 22% of total IA assets under management (AUM). The 40-85% is the largest multi-asset market at £82.4bn, while the 0-35% is the smallest at £10bn.

The majority of these sectors were subject to outflows over the past 12 months (to end of June), with the mixed investment 40-85% and volatility managed categories bucking that trend.

The 0-35%, 20-60% and targeted absolute return markets in particular were hit with significant outflows over the period. In the more defensive areas we’ve seen investors grow impatient as the funds have not offered the level of protection they would have expected during a downturn.

Money market funds have been among the biggest beneficiaries of investors switching out of multi-asset portfolios, thanks to the relative security of returns that have risen on the back of rising interest rates.

A consistent theme we have observed is the flow of money towards passive and low-cost solutions, many of which are risk managed. This is reflected in the strong inflows into the volatility managed sector over the past 12 months, which is home to many of these funds.

However, the largest low-cost multi-asset range remains Vanguard LifeStrategy. These funds are categorised in the mixed investment sectors, with the largest two funds in the range falling into the 40-85% market and making up around 28% of its AUM.

Other household offerings including L&G’s Multi-Index range (£7bn AUM) and HSBC’s Global Strategy (£6.5bn) also continue to grow assets, but find themselves a long way behind Vanguard in terms of market share. These three ranges have all been subject to positive flows in the past three years as investors continue to favour low-cost solutions.

To read the full article by the Square Mile investment research analyst, visit the September edition of Portfolio Adviser Magazine

For more insight on UK wealth management, please click on www.portfolio-adviser.com

In 2021, interest in Bitcoin soared as the global economy opened following the covid-19 pandemic, pushing valuations higher, hitting $67,566.83 (£56,480.3, €65,311.4) on 8 November.

But rising inflation and greater geopolitical and economic uncertainty have seen the cryptocurrency’s valuation fall over the past 12 months.

In the year to 23 November, Bitcoin has fallen by 71.4% to $16,465.

But with many cryptocurrencies now trading at considerable discounts compared with one year ago, could an opportunity be opening up for UK retail investors?

Real value emerging as sugar rush fades

Current valuations and the appeal of an asset class with less correlation to poorly performing stock markets might offer an attractive entry point for some investors.

Bitcoin and other cryptocurrencies are widely regarded as the ‘future of money’, said Nigel Green, chief executive and founder of DeVere Group, with investors drawn by the inherent and future value of “digital, borderless, global, tamper-proof, unconfiscatable currencies”.

As a cryptocurrency investor, Green said he has been buying the dips “embracing short-term volatility for longer-term gains”.

“It is worth remembering that despite coming down [over] 50% from its hype and heat-fuelled November high, Bitcoin remains the best-performing asset class of the decade,” he said. “And as the sugar rush of free money fades away, we can see the real value of assets.”

While valuations may not rise as quickly as last year, investors should expect “a less high-octane, more steady, continued upward trajectory for Bitcoin and other cryptocurrencies” in the next few months, Green added.

Extreme and uncertain outcomes

But Bitcoin and other cryptocurrencies remain a polarising asset class among the financial adviser community.

They were recently described as “portfolio kryptonite” by global asset manager PGIM, which claimed cryptocurrencies do not possess three key attributes of an investable asset class, including: a clear regulatory framework, acting as a store of value, and a predictable correlation with other asset classes.

Laith Khalaf, head of investment analysis at investment platform AJ Bell, said the fall in the value of Bitcoin over the past year is unlikely to have made it a more attractive investment, describing it as “more speculation than investing”.

“Most people who have invested in Bitcoin in the last three or four years have done so with a small amount of money as a bit of a punt. And I think that is precisely the way to do it. It should not have any place in a retail investor’s strategy.”

Khalaf added that it remains to be seen what long-term role Bitcoin and other cryptocurrencies will play in the future.

“It is entirely possible that it could become a functioning part of our monetary system, although I find that unlikely. Equally, it could be proved entirely worthless,” he explained. “So, the outcomes that you can get from Bitcoin are quite extreme and extremely uncertain.”

Gavin Haynes, co-founder of investment consultancy Fairview Investing, said getting exposure to cryptocurrencies in a regulated environment is difficult for UK retail investors, although the FCA is looking to expand its expertise in the area.

Regulatory challenges notwithstanding, Haynes believes Bitcoin remains a highly speculative investment.

“One year after the world’s first ETF-tracking Bitcoin [ProShares Bitcoin Strategy ETF] was launched, it has lost investors more money than any other ETF. Twelve months down the line, it has lost 70% or so,” says Haynes. “In a challenging environment with high risk aversion, it might take some time for investors to gain an appetite for more speculative areas.”

Picking the right coin

Nevertheless, the hype around Bitcoin and other cryptocurrencies is likely to remain as they weather the post-covid economic downturn. Indeed, even though Bitcoin has more than halved, it is still worth thousands of dollars.

Although deciding how much of their portfolio to invest in cryptocurrencies will be one of the most important steps for investors, DeVere Group’s Green said thinking strategically will play a huge role in understanding the risks involved with the coins.

“It is generally better to do your own research on the types of cryptocurrencies; understand how they work and their history, before deciding on which to participate in,” he added.

“Things you should be looking at are the purpose of the cryptocurrency, how long it has been in the market, market capitalisation and its underlying solutions.

“Cryptocurrencies that solve problems are likely to succeed more than those that do not. The longer a cryptocurrency has been in the market, the more trust it has attained, and cryptocurrencies that are developed on strong networks will stand higher in value.”

This article first appeared on our sister publication Portfolio Adviser.

Friday marks three years since Neil Woodford’s £3.7bn ($4.6bn, €4.3bn) flagship fund was suspended after Kent County Council tried to withdraw its £263m stake. The fund had been hammered by increasingly high redemptions, leaving it with a rising portion of illiquid assets.

Investors, many of who lost over half their initial investment, have only received a portion of their money back since the fund began winding down in October 2019.

Link, the fund’s authorised corporate director (ACD), has warned they could be waiting until 2023 before their cash is returned, as it struggles to sell the last of the fund’s holdings, which are mostly hard-to-trade biotech names.

Meanwhile, the FCA has still not concluded its investigation into the matter and has not held anyone to account.

Costly and lengthy process

Robin Powell, author and founder of The Evidence-Based Investor blog, says there is no excuse for the wind-up of the fund to be taking this long.

“It could have been handled far more quickly and efficiently than it has been. It’s very disappointing, too, that the process has cost so much money, which only adds insult to injury for investors. They’ve paid far too much in fees and charges already.”

He added: “It’s hugely disappointing that we’re still awaiting an official report from the FCA. Three years is more than enough time to come up with a report. The sad thing is that many Woodford investors were already in, or at least approaching, retirement. Some of them lost life-changing sums of money. It’s unclear whether they will ever be compensated. Indeed, some have already died.”

Ben Yearsley, co-founder of Fairview Investing, agrees there has been little progress but concedes there may be some mitigating circumstances. “Selling unquoted companies takes time, though I wish they had taken more time with the bulk of the portfolio, which in hindsight now seems a hasty decision.

“The other issue they are probably facing is the market has turned against high growth companies so the number of buyers is more limited.”

AJ Bell head of investment research Ryan Hughes says investors will doubtless feel Link and the FCA could have done better through this period. “There is a delicate balance between winding up the fund and getting a fair price for the remaining assets. After three years, I suspect many investors would prefer to draw a line under this, accept a lower price and move on.

“However, the furore that occurred when Link sold assets to Acacia Research for £224m – some of which were then quickly sold for huge profits – will no doubt have made them wary of accusations they’ve sold assets on the cheap”.

As to the investigation itself and interviews of witnesses, Yearsley said: “I imagine they are into the hundreds of thousands of pages of documents now. Covid clearly didn’t help with the whole work from home culture”.

Alan Miller, co-founder and chief investment officer of SCM Direct is far more critical of claims that covid was a factor in the lengthy – and ongoing – investigation process. “Zoom operated fine right through covid and Woodford is known for running a paperless office, so I don’t buy it that this was a justified reason for delay.”

FCA under fire

Is the FCA’s own failings in the saga – failing to act on numerous warnings about the liquidity of the fund – a reason for such scant progress?

“Quite possibly, yes” is Powell’s response. “The impression the FCA gives is that it wants people to forget about Woodford. Given that the FCA had handled things so badly from the outset, that’s no surprise. But it can’t keep on delaying this report indefinitely.”

Miller stresses that this is one of the largest industry scandals in living memory and that the response from the FCA so far has been nothing short of shameful.

“The disproportionate amount of illiquid stocks (30%) was evident in the first few years of the fund, not just at the end. The issue is not the rules, they have been there from the beginning, the problem was lack of proper oversight. When the fund breached the 10% rule, it should have been highlighted.”

Are best buy fund lists less trusted?

Powell suggests a positive to come out of the Woodford scandal is that there’s now less prominence given to best-buy fund lists. Investors are also less trusting of them.

“The Woodford Equity Income fund went straight onto the Hargreaves Lansdown list when it was launched and remained there until the fund was suspended. Hargreaves gave the impression that they were experts, and that they were monitoring the fund closely, but clearly neither of those things was true”.

He added: “Best-buy lists have always been about sales and marketing. Only a tiny fraction of funds beat the index in the long run on a cost and risk-adjusted basis, and outperformance is so consistent that picking the winners in advance is almost impossible.”

Miller is similarly unenthused by the best buy fund lists. “There is so much uniformity with these lists. They are not considered advice but appear that way.”

Lessons learned and reputational damage

According to Powell, the Woodford fund collapse was a rude awakening for the funds industry and, to an extent, lessons have been learned.

“There’s less emphasis now on star managers, and more focus on teamwork and succession planning. Fund management companies are realising that investors want to know what the plan is for when a manager leaves.”

He believes platforms and brokers are less inclined than they were to promote high-profile managers quite so brazenly. “There’s also more media attention given to the alternatives to traditional active management, though still not enough.”

Hughes insists the protracted affair has highlighted the total unsuitability of illiquid assets in open-ended, daily traded funds.

“Thankfully, one of the outcomes of these events is that other managers have removed such assets from their funds. Ripple effects have also reached the open-ended commercial property fund market, which could see fundamental changes to try and balance liquidity and accessibility”.

He concluded: “Ultimately, the fact that this saga has dragged on for so long has been damaging for the reputation of the whole industry. No doubt we will hear the familiar words ‘lessons will be learned’ once the final review is concluded by the FCA, but I suspect that will be of little comfort to the thousands of investors impacted and it will take a long time to regain the trust of these people.”

For more insight on UK wealth management, please click on www.portfolio-adviser.com

The implosion of UST, a token that used an algorithm to maintain its dollar value, has set alarm bells ringing.

Many cryptos have made it to market but not lasted the pace since digital coins first arrived in 2009. But the terra stablecoin was seen as an unexciting token that simply tracked the dollar. In theory, it shouldn’t have been vulnerable.

Its sudden collapse has called into question how the entire crypto market will function in future.

In early April, Luna peaked at $116, helped by strong interest from retail investors. But just a month later its value had sunk to zero after its sister token, UST, collapsed in value.

The ‘algorithmic’ stablecoin attracted $80bn (£61bn, €73bn) of investor money with promises of token-based returns of 20% per annum. When it was clear these returns were not going to happen, there was a dash to exit – with those late to the party (as usual) feeling most of the pain.

The wider impact of Luna’s collapse was severe – the valuation of exchange Coinbase crashed and the price of Bitcoin slumped below $30,000 for the first time since last summer. A far cry from its record high of more than $68,000 which it hit in November 2021.

The collapse in cryptocurrency valuations has also weakened claims that they can provide a hedge against inflation. The Luna collapse could well result in more stringent regulation in cryptocurrencies, particularly in regard to stablecoins.

‘Portfolio kryptonite’

A number of big houses have invested in various digital coins – including Baillie Gifford, Blackrock, Fidelity and Ruffer. The latter of which sold out after pocketing $1bn in April 2021. It will be interesting to see how those that are still invested will react following Luna’s demise.

Our sister publication Portfolio Adviser reached out to the firms named above, but none wanted to discuss whether the sharp drops in valuations will in any way change their strategy or thinking on crypto exposure.

Other investment houses have been clear about their scepticism of the unregulated asset class. PGIM, which described it as “portfolio kryptonite”, said the Luna collapse “highlights just one of the many reasons why cryptocurrency is a poor choice for long-term investors”.

Chief executive David Hunt said it meets none of PGIM’s three investment criteria, which include a clear regulatory framework, an effective store of value, and predictable correlation to other asset classes.

Research from PGIM shows that cryptocurrency is also an unreliable portfolio diversifier and an inadequate safe-haven asset or inflation hedge. Recent risk-adjusted returns are not much different than other asset classes but with more frequent and greater drawdowns. Additionally, the unsettled regulatory backdrop and considerable ESG concerns pose significant additional headwinds for long-term investors.

“Cryptocurrency may be a heroic quest to build a viable, decentralised peer-to-peer payment system, but its pricing is based on speculative behaviour, rather than a fundamental thesis around its value or utility,” said PGIM’s head of thematic research, Shehriyar Antia. “Furthermore, with little evidence to support it as an effective inflation hedge or safe-haven asset, we see no reason for cryptocurrencies to be a part of institutional portfolios.”

Adopting a wait-and-see approach

Investors’ appetite for the white-knuckle ride that is crypto investing might be severely supressed right now. The ‘fear of missing out’ mindset may no longer have the same pull.

Clara Medalie, research director at cryptocurrency market data provider Kaiko, believes investors are watching how events unfold before they make any move.

“Market sentiment remains bearish following UST’s historic collapse. Investors are taking a wait-and-see approach to see how the aftermath of the collapse plays out and what effect it will have on other stablecoins, particularly with regards to regulation and broader confidence in stabilization mechanisms.”

She added: “Tether, the largest and most systemically important stablecoin, has not yet fully regained its $1 peg which suggests traders are rotating funds into USD Coin (USDC), which has undergone a strong surge in circulating supply since the de-pegging event.”

That said, the crypto world is not exactly unfamiliar to shocks to the system. Last year, Bitcoin and the wider crypto market went into meltdown following China’s expulsion of crypto miners and traders – so it has had panic levels before. And some analysts are already talking about signs of a rally now.

Crypto prices have been jumping around following the carnage after Luna’s collapse. On Wednesday both Bitcoin and Ethereum were up on the day – 1.38% and 2.68% respectively, but still down on the week – 4.29% and -13.42%. On Thursday they were in the red again for the day, down 2.17% and 2.27% respectively in late morning trading.

The crypto world may have survived a scary week, but the danger isn’t over and others may yet suffer Luna’s fate as liquidity recedes and momentum slows.

Recent Bitcoin and crypto price volatility is being blamed to a degree on the Federal Reserve embarking on a tough programme of interest rate hikes in an attempt to drive down runaway inflation. Given this backdrop, is there reason to expect even more pain for cryptos? Quite possibly, yes.

Less crowded market

Emma Wall, head of investment research & analysis at Hargreaves Lansdown, believes the crypto market will continue to develop but which names will be left standing after a probable shake out is open to debate. She sees little attraction for investors.

“We don’t offer clients access to Bitcoin, or any other cryptocurrencies, and have no plans to do so. The FCA has also banned the sale of crypto-derivatives to all retail investors due to the harm they pose. Speculating in cryptocurrencies is extremely high risk and shouldn’t be conflated with investing. Those choosing to speculate on cryptoassets should be only commit money they can afford to lose.”

Wall added: “We do think that cryptocurrencies will find a place in the financial system in some form, given the interest by large companies and governments. However, it’s very unclear which of the thousands of cryptocurrencies will retain their value in the future and what role they will play in finance.

“Cryptocurrency is still a relatively new phenomenon and market, which means there could be unknown risks.”

Darius McDermott, managing director at Chelsea Financial Services, has similar reservations. “We have been of the view that crypto is not a mainstream asset class. Broadly it is so volatile and impossible to value using traditional methods.

“I am aware that lots of private individuals have made a lot of money but there are plenty that have lost heavily too. They may have diversification qualities but most mainstream funds do not invest in them.”

This article was written for our sister publication Portfolio Adviser by David Burrows.