"Blue chips and active fund managers on both sides of the Atlantic look appealing," Charlie Morris of ByteTree says
In 2025, investors will either be happy or nervous. Anxious people think that investing is only about expenses. If you purchase some inexpensive trackers, you will succeed in the long run with little work. Active investors who have steered clear of the biggest stocks are the happy ones. With the exception of 1929, 1972, and 1999, it is unusual for the biggest stocks to dominate the market, and it rarely works out well to follow the herd into highly valued sectors.
2025 has been rewarding for me as an active manager, primarily because my portfolios sought value outside of the US. US stocks have underperformed globally due to a weak dollar. The MSCI World index, which has a 70.3% exposure to the US, is up only 2.4%, including dividends, while US stocks have produced no returns in sterling this year. Compare that to the FTSE 100, which is up 12%, or the EuroSTOXX, which is up 20% this year. The idea that the US is exceptional has been overblown once more.
It makes sense for those who don't want to be involved with their finances to invest passively, which probably excludes BFIA readers. It produces a market return before fees and guards against a worse outcome from dishonest actors or inept active managers. It should be the default choice for most people because it is inexpensive and easy to use, and for good reason. As a minority sport, beating the markets is, after all.
That's where the chance is. In 1995, passive management was still in its infancy, but today it is so widespread that, according to US investment platform Market Structure Edge, trading in index products makes up 56% of market volume. Since passive management is so prevalent nowadays, active management ought to offer rich pickings.
This is supported by a recent market trend that indicates active fund management firms are growing this year while passive managers are declining. BlackRock, the company that owns iShares, is down for the year, but shares of institutional active manager Schroders are up 25%. I don't believe this is an isolated incident because of the sizeable valuation discrepancy. Schroders has a free cash-flow yield of 16 percent and trades on twice sales. Compare that to BlackRock, which has a free cash-flow yield of less than 3% and a respectable eight times sales.
Active managers were among the highest rated stocks in the 1990s, but young investors either forget this or have never seen it. These days, they are incredibly affordable. Man Group, Jupiter, and Allfunds, a Dutch company that offers trading infrastructure for the funds industry, are some of my recent picks.
The Money Map of the Investors.
Other notable investment themes include money printing, growing deficits, and gold, copper, and precious metalsall of which benefit from a weak dollar. Cryptocurrency and Bitcoin are becoming more and more popular as core allocations. In addition, China has remarkable technology companies that trade at attractive valuations, and banks profit from high interest rates.
2025, however, has been another year to stay away from gilts. A level not seen since 1998, the long bond yield has stabilized at 5 percent. The yield is roughly right because it is meant to resemble annual nominal GDP growth, which includes inflation (4.4%), and economic growth (11.3%). Either a recession to curb inflation, tough love to address the budget deficit, or "growth" policies that don't entail tax increases would be necessary for it to decline. A balanced budget is unlikely, but a recession will inevitably occur eventually.
The economy may be doing better or worse next year, but does that really matter? I have been interested in financial markets for 30 years, and I am convinced that value is more significant than the economy. My Money Map (pictured), which I last wrote about for BFIA in 2017: What to take with you in the investment jungle, is crucial in this regard. It describes the best investment approach for various macroeconomic conditions. Remain on the right when things are going well and on the left when they aren't. When inflation is low and steady, duck; when it is rising, stay high.
The Money Map.
This concept has long served as the foundation for my portfolios, which are made up of cheap stocks, bonds, commodities, and funds. The Money Map aids in pinpointing the most crucial areas to concentrate on and, more crucially, the ones to stay away from. Having exposure to each quadrant, regardless of the weather, is the most important way to diversify a portfolio because macroeconomic conditions can shift rapidly.
Having said that, I am more exposed to the quadrant that is favored and its neighboring quadrants than I am to the one that is least favored. In recent years, this has meant keeping growth and gold in the portfolios largely neutral while adding more value and fewer quality and bond holdings. This will change eventually, most likely when interest rates decline and there are unmistakable indications that inflation is under control.
You will have noticed that quality stocks like Unilever, Diageo, and Reckitt Benckiser have struggled in recent years and now offer good value, so I am looking forward to that. High-quality US stocks like PepsiCo, McDonald's, Procter and Gamble, and Nike are also declining; perhaps they will be inexpensive by 2026 or 2027. In any case, it's encouraging to see that the top businesses in the world have had their bubble burst and are on the decline.
ByteTree's founder and CEO is Charlie Morris. Along with other research services, it provides private clients with investment research through the Multi-Asset Investor. Additionally, ByteTree offers a Bitcoin and Gold ETF (BOLD), which is run by Zurich-based 21Shares.
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