Predicting the unpredictable

The start of a new year brings with it many traditions. From ‘first footing’ in my native Scotland, to hanging up onions around your door in Greece, to wearing new yellow underwear in Peru.

Many fund groups also have their own tradition, which involves publishing their thoughts on the investment opportunities and risks that may occur in the year ahead.

A broad consensus

However, what is different about the market outlooks for 2025 is the broad consensus amongst many managers. In simple terms, most are identifying the US as the best equity market to invest in over the year – and Europe as the worst.

With the US tipped to win, why diversify?

So, if the outlook is as binary as this - what is the point of multi-asset investing? Based on the evidence at hand, perhaps you should have no exposure to Europe and bet it all on a US growth fund? That approach would certainly have served you well over the last 12 months.

But let’s look at the consensus across investment outlooks from the last five years. How did they play out? Well, in 2020, coronavirus meant that predictions were meaningless by the end of the first quarter. In 2021, very few anticipated the enormous rise in inflation, which was described as ‘transitory’, until it was clear it wasn’t. In 2022, aggressive hikes in interest rates caught markets off guard, leading to the worst year for fixed income on record.

In 2023, there was a widely predicted US recession that never happened. And in 2024, very few expected the extraordinarily positive returns from US equities. So, every year for the last five years, clever people have made sensible, reasonable, and logical predictions about the year ahead. And every year they have been wrong.

The only sure bet: expect the unexpected

So, what we can predict with absolute certainty for 2025? That forecasts won’t be 100% right. Unexpected events will happen, which will have a knock-on impact on markets.

And that is where multi-asset investing comes into play. The secret is to find a multi-asset investment solution that gets it right more than wrong. That doesn’t sound too hard – and yet many multi-asset investment managers provide returns that can be disappointing relative to the broader market. So, what should you look for? We believe it is about having the right approach:

1. Begin with a sensible view of the most appropriate asset mix for a given level of risk. This involves looking at the potential returns from each investment area, the associated risks, and how each investment area correlates with the others. That provides a solid starting point.
2. The next step is to consider the economic landscape, market environment, and political temperature. Then, to alter exposures accordingly based on the short-term impacts.
3. Third, combine these views and diversify investments across geographies, asset classes, and management styles to create portfolios that are managed to the required level of risk.
4. Then, you need to regularly rebalance and update the portfolios, considering anything that may have changed from the first three steps.

Reacting to the unpredictable

However, you must also be prepared for the unexpected and react quickly. An example is our response following Liz Truss’s ‘mini budget’ in 2022. The £45bn of unfunded tax cuts it contained led to drastic falls in gilt prices (increasing yields).

Following the mini budget, the Bank of England made a statement to calm investors, and the portfolio managers of our Cirilium Blend Portfolios were able to act swiftly. They purchased an index-linked gilt ETF that captured the recovery in the price of index-linked gilts.

Over the course of just two days, this position increased in value by more than 20%. Overall, this was a relatively small position in the portfolios, but still had a positive effect on the Cirilium Blend Portfolios in what was a very difficult year to be invested.

Staying humble

Finally, multi-asset investing is about staying humble. That means you accept that you may not always get it right, you are prepared to learn from your mistakes, and you adapt your approach accordingly. It’s this wisdom, informed by learned experience and continuous review and analysis, which can makes multi-asset investing a good choice in all market conditions.