Tradewinds

Selecting a Fund Manager: Getting it right matters….not getting it wrong matters even more!

Choosing the right asset or region is clearly a significant part of any investment decision. But selecting the right manager to make all these decisions is arguably equally, if not more, important. This applies predominantly to the active space but there can also be nuances in indexed investment solutions.

I looked at some MoneyMate statistics on Irish-based funds. I focussed purely on Global Equities, both active and indexed. I grouped the funds by their fund ratings in order to get consistency on their actual experience of risk levels. This should aid comparability across the funds. I then simply looked at the performance gap between best and worst. The results are below (all figures annualised).

Five Star Rating	One Year	Three Year	Five Year
Best	11.3%	15.1%	14.7%
Worst	-0.1%	4.4%	9.3%
Gap	11.4%	10.7%	5.4%

Four Star Rating	One Year	Three Year	Five Year
Best	22%	19.5%	14.7%
Worst	4.8%	7.7%	9.4%
Gap	17.2%	11.8%	5.3%

Three Star Rating	One Year	Three Year	Five Year
Best	14.7%	14.8%	13.6%
Worst	7.4%	6.4%	4.9%
Gap	7.3%	8.4%	8.7%

What’s very clear are the significant gaps between the winners and losers. Gaps which can dominate the actual performance of the asset class. And these are all managers essentially doing the same job with a very clear mandate.

So the clear take-away is the critical importance of manager selection in the overall investment decision. Probably no surprise really.

But drilling into the numbers, one other aspect is worth noting.

The data suggests that while the winners can vary over different time periods, there is greater persistence at the lower end of the league table. The same fund can appear in the “worst” section for many years. If things are tough, they can often stay tough for quite some time.

Why might this be?

If a fund has a particular style (such as value or growth) it can be out of favour for very long periods. If it’s hard-wired into the philosophy or label of the fund, there isn’t much remedial action that can be taken. But then you knew this prior to selection.

Even if it’s not as explicit as that, a particular approach may be “hard-wired” into the fund manager!

And so even after disappointing performance there is little questioning or reversal of basic principles. Conviction morphs into stubbornness. This can often be where a fund follows a very distinct or proprietary investment process. Such rigidities offer little prospect of a swift reversal of fortunes.

So in the active world, we can see manager selection matters a lot, But avoiding the laggards is maybe more important than picking the winners.

European Asset Management: Fast Forward Five Years

On the face of it, investment managers seem to be having a better time of it of late.

The group has recovered from the April decline, when according to the Bank of America survey, sentiment towards the global asset management industry was at a 30 year low. The recovery since then means many are posting good share price returns so far this year.

Manager	Share Move YTD
M&G	+29%
Jupiter	+53%
Schroders	+24%
Blackrock	+8%

Challenges remain however, and the landscape is likely to continue to change over the next 5 years. A recent report from McKinsey highlighted some of the key factors that will drive investment management here in Europe.

Business was better in 2024. In Europe, assets under management rose to €28 trillion – a record level. However profit levels are still 20% lower than the record set in 2021. This was due to a lower margin mix of business and continued rising costs. Operating costs for investment managers are up 10% over the past 3 years.

Basically there were positive net inflows into low margin passives and bonds and net outflows from higher margin active funds. The share of passives in Europe has grown consistently over the past 10 years from 11% in 2015 to 25% today. From €5 trillion in passives in Europe now, Morningstar expect the number to rise to more than €7 trillion in 3 years’ time. In the UK, the number of investors in ETFs surged over 50% in both 2023 and 2024.

This suggests more price pressure on active products. Average management fee on active products here in Europe was 42 basis points compared to 13 basis points for passives. There’s also pressure within the active universe as active ETFs gain share. McKinsey forecast 25% per annum growth in active ETFs in each of the next 5 years.

And if this wasn’t tough enough, European asset managers are also facing other challenges right on their doorstep.

European managers are losing market share to US-based players.

In 2007, there were 7 European managers were in the global top 20. Today there are only 4. And their market share has gone from 31% in 2007 to 11% in 2024.

European managers are capturing only about 40% of net inflows in Europe, while US managers are capturing almost 100% of their domestic flows. Partly this is due to many innovations in the industry (thematic investing, quantitative processes, alternatives etc.) being developed and scaled in the US, and partly due to the continued importance of scale.

So, if we fast-forward 5 years for our European asset managers, what does the landscape look like?

Margin pressure will likely remain both from the revenue line and the cost line.

Where is the pressure going to be greatest?

Probably in the “squeezed” middle.

If big European players can continue to build genuine scale, they can compete with the global giants. European asset management is still fragmented relative to the US. The top 10 European players account for 22% of total AUM in Europe. In the US, the corresponding figure is 74%.

At the other end of the spectrum, true alpha generators can also find a space where management fees can be justified and maintained.

For those in between, it will be difficult to capture flows and grow revenues all from a competitive cost base.

Expect industry consolidation in Europe to continue.

Over the next 5 years we should also expect to see increased spending on technology. Currently IT spending accounts for about 18% of total operating spending at European asset managers, and of this only about 20% of this is directed to application development or change. AI will play a pivotal role here.

The European asset management industry is in a period of structural change. Firms face sustained margin pressure and increased domestic and foreign competition. Long standing operational models are being eroded.

Expectations of the industry are changing, too. European policymakers are challenging asset managers to support strategic economic and social priorities, in a way maybe other policy makers are not.

European asset managers need to be crystal clear about their value proposition

Markets: Uncertainty, Volatility and Risk – What’s the Story?

A constant theme for investors in 2025 has been the disconnect between what’s been happening in the real world of politics and policy, and how financial markets have responded. The chaos of constant policy shifts has to date been weathered by financial markets, with stock indices not far off all-time highs. This can only be based on a benign view that outcomes may be better than feared and markets are willing to look through the carnage.

Or are markets just complacent?

Firstly, let’s be clear – uncertainty around economic policy is simply off the charts!

We have never seen this level of confusion as regards economic management – ever. The index of policy uncertainty (EPU) soared in 2025 and remains elevated. Trade policies via social media suggest little likelihood of a calming soon.

Last week the Bank of England warned that risks remained high and of a threat to financial stability from global tensions

Stocks have recovered from the falls of early April and market health indicators such as breadth, while maybe narrower than we would like, are within recent ranges. There has also been a sense of markets becoming less sensitive to every tariff tantrum or tweet.

Uncertainty and volatility are two different things. Are there other warning signals out there?

The “go to” measure of market uncertainty is the often quoted VIX index. The VIX measures expected volatility in the S&P 500 based on options pricing. That means the VIX isn’t just showing what happened in the past… it’s forecasting what traders think might happen in the stock market over the next 30 days. In early April this index spiked to over 50 but has been sub 20 most of the time since – a strong sense of “nothing to see here”.

And it’s not just stocks. The MOVE index which does the same thing for bonds has almost exactly the same profile, spiking in April and falling away significantly since. In the past how bond markets perform has had knock-on effects for stocks. For those who remember the TMT crash, we saw stress first emerging in corporate bond yields, before impacting on equities. We have seen sporadic short term fall-offs in bond markets such as the US and UK, only to recover reasonably swiftly. US 10 year bond yields are close to where they started the year around the 4.5% level. It’s a similar story of stability in corporate bonds.

So the internal dynamics of equity and bond markets are not flashing amber despite the economic uncertainty.

What do investment managers think?

This week we got a glimpse of how fund managers feel currently. And similar to technical uncertainty measures, those who make the investment decisions have also regained their composure since the April fall-out. The Bank of America July Fund Manager Survey shows that investor optimism has reached a five-month high, with cash holdings decreasing to 3.9% and significant increases in US and European stock positions. Fund managers chose to put any cash that they had built up back to work in the markets. I’ve always seen this as a contrarian indicator.

As traditional market signals of stress and volatility are not revealing much in today’s environment, some asset managers are looking to novel approaches to gain an edge on market direction. Blackrock, the world’s largest asset manager, are tracking Trump’s use of capital letters in his social posts to tap market sentiment. They believe it has a powerful predictive component.

Market risk indicators are suggesting a “business as usual” scenario, but escalating trade tensions, attacks on central bank independence, imminent inflationary pressures, increasing deficits and slower growth could undermine this stance.

How are Irish Investment Managers managing?

Most Investment Managers acknowledge that these are tricky times for their funds and their customers.

Words like “unprecedented”, “new global order” or “seismic shift” are to the fore in managers’ commentaries.

And rightly so.

The risk of escalation in trade wars and real wars remains a huge threat and leaves us in an environment of likely higher future inflation, pausing investment programmes and global economic downgrades.

The Global economy is slowing and likely to slip further. The IMF and the OECD, amongst others, have reined in their forecasts. Here the ESRI and the Central Bank have also pulled their numbers back. The Central Bank sees domestic demand in the Irish economy stuck at the 2% mark for the next three years due to this global uncertainty and on-going trade tensions.

Against this highly uncertain background, to date stock markets have been somewhat resilient – often reacting to negative news and then rebuilding over time. Global equities, as measured by the MSCI World Index, have seen a drop of 12% at one point, only to be up around 4% in the year so far. Standout markets include Germany which is up 16% in the first half of the year. Market volatility spiked in April but has fallen back since.

The other big factor in Irish investor returns has been currency, as the dollar has weakened significantly versus the Euro, and global indices have become very top heavy with US exposure.

It’s also been important to be in the right sectors of the market so far this year. Looking at the different sectors in the US S&P 500, we see significant divergence in performance. The consumer discretionary area has suffered the most with a decline of over 7%. Healthcare has also been weak losing over 4%. Against this, we have seen a rise of around 8% in sectors like industrials.

So how are Irish investment managers doing in this febrile market environment?

Using Longboat Analytics data, I looked at their highest rated managers (5 star) in both the Balanced Managed Fund and the Global Equity space for the first six months of the year.

In the Managed Fund category, 6 month returns ranged from +0.3% to -2.4%, with most funds clustered together with a small negative performance in aggregate. The better performers were one which highlighted dividend income in their investment process, which seems to have provided some protection.

Within Global Equities, again the average return to date has been a small negative. The range of returns delivered by highly rated managers has been from -3% to +1.5%, with negative returns dominating the sector.

So it’s been difficult for funds to make progress so far in 2025. It’s not surprising given the volatile nature of financial markets.

But we’re probably still in the “phoney war” phase of trade conflicts and yet to see the true impact of higher tariffs on prices and activity. Company analysts in the US are already posting larger cuts than average to second quarter earnings forecasts. Central Banks are wondering if they should pause rate cuts in the face of a tariff-driven inflationary threat.

So it’s still going to be a very noisy backdrop for investors to navigate.

The resilience of markets and of funds so far should not be taken for granted.

Time to re-visit Property as an Asset Class?

Just over 6 months ago, I posted a piece on Irish Commercial Property wondering if there was a case to include, or add to it, in your investment portfolio.

So what’s been happening?

The commentary so far this year coming from property managers talks of a stabilizing or a re-set for the Irish Commercial Property market. That’s what the figures show as well. For the first quarter of the year, commercial property returns here were just under 1%. While not very exciting, it compares reasonably well with a typical managed fund return in the same period of about negative 4%. Equities and bonds have been challenged significantly in 2025 so far.

Deciding on asset allocation plays a big part in investor returns, but it’s always a tricky call and especially when, as now, the market environment is highly volatile. As regards overall asset allocation, for many Irish institutional multi-asset funds, allocations to Commercial Property are at the lower end of their historical range. Currently they sit around 3%. In the past they have been significantly higher.

Investing in a typical Commercial Property fund in Ireland is still very much about investing in Dublin Offices. I looked at 4 of the leading institutional property funds and the largest exposure is always to the Office sector.

Sector	Fund A	Fund B	Fund C	Fund D
Office	73%	49%	39%	59%
Retail	9%	23%	25%	30%
Logistics	15%	11%	20%	10%

So how do the investment numbers stack up right now? Yields on prime office properties are around the 5% mark – higher for suburban and secondary. 10 year government bond yields for comparison are just under 3%. This is based on a rent of about €65 per square foot.

Are rents forecast to rise? Yes – but not shooting the lights out. At the start of the year Irish surveyors were suggesting a rise of just over 1% in rent levels. CBRE, who produce solid research, are pointing to over €67 next year and €70 in 2027.

As regards supply and demand, vacancy rates, though still high, may have reduced somewhat as the Workday deal at College Square has now completed. CBRE suggest a vacancy rate for the first quarter of the year of about 19%. This is probably peak. However, anecdotally, available Grade A+ space in city-centre is much tighter.

Recent take-up has been mainly in the Central Business District, and predominantly from technology, business services and public sector.

So with prime yields of 5% or more (and possible rent increases) in an environment where interest rates are likely to fall further, and other assets may face challenges, we can see an investment case for commercial property.

However there are two mega-trends to keep an eye on and they are the same as noted in previous articles on the blog.

As a positive driver we seem to be past peak “work from home”. Last week Savills produced a survey showing that Gen Z and millennials were open to spending more days in the office, subject to certain “perks” such as subsidized canteens or gym membership. The survey found that 85% of Irish workers would spend more time in the office.

However on the negative side is the question of global and domestic economic activity, business confidence and investment plans, given the very liquid nature of US trade and economic policy. Department of Finance research last week showed how tariffs can be a hit to our GDP and to job creation. And this is before any potential developments in the Pharma sector.

This may well be the biggest single factor to consider in coming to a view on the asset class.

Investment Managers in this Crisis: What are they saying; how are they doing?

How are investment managers faring in this current market crisis and what are they saying to their customers?

Scrolling through the comments and advice that investment managers and financial advisors are giving currently reveals a broadly consistent message. I’ve looked through the comments and advice from firms based here or selling into the Irish market. The actual wordings in their commentary and advice include:

Stay diversified

Focus on European Fixed Income

Potential for stocks to rise on 12 month basis

Remain invested

Buying opportunity

Temporary decline in markets

The general message is if you don’t have to, this is not the time to sell. Many advisors will cite historic stock market performance, stressing how stocks have typically bounced back and that trying to time the market can be very costly. So the overriding advice is to stay invested.

This market crisis is coming on top of other challenges for the investment management sector, caught between increasing costs on one side (often driven by regulation), and constrained revenues on the other (driven by competition from cheaper investment options). The sector had a tough 2024 and the market meltdown of 2025 just added to the stress

We can see this in the share prices of quoted management groups. At time of writing most stock markets are about 12% off their highs this year. On the same basis, we can see the price performance of several investment management groups.

Firm	Fall from High
M&G	-20%
Aberdeen	-24%
Schroders	-28%
Jupiter	-16%
Blackrock	-18%

The quoted investment management sector has performed significantly worse than the average stock. The sector is clearly a geared play on how markets perform. As markets go up generally, the value of assets under management, and the fees earned thereon, also rise, boosting profitability. This is what makes asset management an attractive business. However when stock markets fall, we see the opposite – lower revenues and fixed costs impacting on margins.

But a bigger risk for the sector is the loss of assets if investors decide to sell. This can mean that as markets bounce back, a firm may have less assets to benefit from on the way up.

Where do we stand at the moment? Well it’s early days, and a prolonged market downturn coupled with a poor economic backdrop is what would unnerve investors most.

But there have been one or two headlines which might cause some stress. In the UK, equity funds suffered their biggest outflows on record in the first quarter of the year with withdrawals of £3.5 billion (CityAM). And Morningstar report that $22 billion was taken out of US funds in the same period. Some fund management groups have also reported net outflows in this first quarter reflecting market volatility and a reset in investment return expectations.

The business performance of investment companies through the market crisis will reflect factors like the mix of business (retail or institutional) and the range of assets they manage. Some business will be quite “sticky”.

A fall in asset values impacts all managers, but for some, the loss of assets is also a threat.

Credit Where it’s Due

There’s a lot going on at your local credit union today.

Nearly 4 million of us are saving over €18bn with them, and they’re lending out over €7bn back into the local community. And there’s a lot of change within the sector. In the past 10 years or so we’ve seen the total number of unions halve and the number of larger ones double, and in that period total assets have grown by 50%.

So they matter.

But they operate in an increasingly complex and competitive market, and are themselves undergoing some fairly consequential changes. It’s a financial landscape with both opportunities and challenges. We’ve seen exits and entries in the mortgage and banking space and credit unions now have the regulatory scope to provide a broad range of products and services, including mortgages, business loans, current accounts and mobile banking.

In this very fluid landscape, the Regulator has a very clear vision – ‘strong credit unions in safe hands’.

The Central Bank recently set out what it sees as some of the key risks facing credit unions including liquidity risks, governance and a concentration in a limited number of third party service providers especially in technology and payment services.

However ‘resilience’ is a watchword in the sector. Credit unions performed well through the ‘Great Financial Crisis’. Currently average loan arrears are now below 3%, having fallen from a peak of 20% just over 10 years ago. As the loan book has grown, so have the unions’ competence in governance and risk management. Reserve ratios in aggregate are very strong.

What’s the business imperative for the credit union movement today?

To grow the loan book.

The sector is under-lent. While the pace of lending has picked up – it’s still too low. Reflecting this, the average return on total assets today is probably just below 1%. Over the last five years it averaged 0.6%.

Just over 10% of the loan book is in mortgages – but the credit unions are a tiny percentage of the Irish mortgage market.

Changes in regulation will allow greater lending.

The sector can and will grow its mortgage book. Recent momentum has been strong and a growth rate of 40% or more in the next two years is envisaged. But as important as how it grows this lending, it’s also critical where it grows – especially in terms of demographic grouping. A recent survey noted how important economic, social and governance factors are for younger age cohorts when making financial decisions. We have also seen ESG as a growing influence elsewhere in the financial sector such as pensions and investments.

Credit unions have a number of key attributes in their arsenal which can appeal to this younger cohort – strong local community engagement, environmental awareness, financial inclusion, social impact, diversity initiatives, an increasing digital footprint, growing online presence – all which have contributed to consistent winning performance in customer satisfaction surveys.

The task is to apply these attributes in growing their market share.

The dynamics of the mortgage market are changing. It will be a very competitive space, not only with the large incumbents but with new digital offerings and European based disrupters.

Research on credit unions globally from McKinsey stressed the importance of winning market share in new account openings. This ensures future momentum. McKinsey also noted that existing members of unions highly value them. The task is transmitting this message to prospective members.

Share of new account openings should be a key performance indicator for the sector. For the newest customers in the mortgage market where issues around the environment, or social concerns can be key, credit unions can tick a lot of boxes.

Credit unions need to catch the wave.

Irish Funds: Where Are The Risks?

Last week the Central Bank of Ireland published a report on the key risks and trends shaping the financial sector.

The Regulatory & Supervisory Outlook (RSO) report gives the Bank’s view on these risks and what they see as the key priorities to address them in the next two years.

From this we get a good sense of where the regulator feels the funds sector, as well as the overall financial system, is most at risk.

The Central Bank rightly notes the importance of Ireland as a global funds domicile. There are about 9000 funds authorised – worth almost €5 trillion. This is up over 20% from 2023. ESG funds represent a massive 36% of all Irish funds. We also have the largest Exchange Traded Funds sector in Europe – about two-thirds of the total assets in the euro area.

So, all in all, this is clearly a vital sector for our overall economy.

Where are the risks today?

Firstly, from a macro perspective, there’s certainly no shortage of risk out there! The Central Bank continues to highlight the elevated level of geo-political risk for financial markets. Investor sentiment is fragile, and in their view risk in some sectors is clearly mispriced today. The Bank also highlights how concentrated some assets and markets have become, and the implications this may have for the future volatility of returns.

At fund level, high on the regulator’s risk list are the interlinked dangers from liquidity and leverage. These concerns have been highlighted now for some time and remain a potential source of fund volatility and poor investor outcomes. The Bank continues to drive macroprudential measures to mitigate such risks. Another evergreen source of risk in funds for the Bank is in the area of money laundering and suspicious transactions. And there’s more work to be done here.

The Central Bank will continue to apply resources to such issues to ensure we have a resilient, successful and future-proofed funds sector.

But what’s also interesting in the report are possible emerging sources of risk for funds.

Is AI a risk for the sector? In the words of Frankie Byrne (whom nobody will remember) “These may not be your problems today – but they could be someday”.

So today while many service providers expect to use AI in the future, current usage is limited. But for the bank this falls into the emerging risk category. While AI could have a productive role there is also the potential for unwanted bias and poor investment decisions which would harm both investors and firms.

The funds sector has been very successful in the ESG space. Today, more than ever, this is an area that is having to cope with growing and powerful cross- currents. This tug of war is being played out in the funds sector.

The Central Bank notes how we have seen a downward trend in the number of the most sustainable cohort funds (“Article 9”) and a pick-up in the number of less onerous Article 8 funds. This is backed up by Citywire analysis which shows Article 9 funds in Europe on a 16-month losing streak, having experienced a cumulative outflow of €30.6bn. This leaves them in the red for the past three years. An on-going issue is the consistency and transparency of data. This adds to the threat of greenwashing and misleading or confusing investors.

Interestingly, the bank also notes a trend towards “greenhushing” where some funds may seek to downplay their ESG credentials. This is partly down to a changing political and geopolitical environment.

Given the exposure of our funds industry to this sector and this dramatically changing landscape, we need to remain vigilant.

The report covers more than just the funds sector and is essential reading for many in what is an increasingly complex and risky financial world.

What do Fund Investors really want?

Those well known investment experts, Simon and Garfunkel, way back in 1970 stressed the importance of keeping the customer satisfied.

It’s a point that shouldn’t be lost on investment managers. I imagine most managers think they have a clear sense of what their customers want from them. Fact-finds, for example, may give them a good sense of how their customers feel about taking risk. The manager can then assign the customer to one of the (very wide) industry-accepted risk buckets.

But does the wealth management/investment management industry really have a solid handle on what their customers want?

What do customers say?

Recently, the Chartered Institute for Securities and Investment (CISI) hosted a session where a survey of what fund investors want from their funds was unveiled. This useful survey covered a range of issues, and some of the responses might surprise.

What wasn’t a surprise was the importance of investment performance. For most investors it was an ever present feature in their top three requirements from their fund. And it wasn’t about shooting the lights out with spectacular returns. The majority of fund owners would be happy with average returns in the 6 or 7% band.

There was also a lot of common ground around what were the main concerns of fund investors. The biggest worries for customers were around issues like the risk of capital loss or sharp volatility in markets. Again probably not a surprise, but financial concerns like these came in way ahead of issues like the environment or ethics.

This appetite for risk and the demand for return clearly reflect why investors bought funds in the first place. Retirement and family financial well-being feature heavily in why customers put money into funds.

What about sustainability issues? Do these matter a lot for fund investors? This is interesting given how much it is a key driver on the investment manager side of the industry.

It was rarely among the top issues for fund investors, but it did feature. What was interesting was the difference in how different age cohorts viewed “ESG”. For younger investors, those under 40, it was a consideration. Less so for those in the 40-60 age bracket and quite far down the list for those over 60.

A recent report from EY looked at asset management priorities for 2025 and stressed the need for investment managers to embed sustainability in strategy, governance and operations. Asset allocations should be guided towards diversity, transition, the blue economy and similar areas.

In some geographic areas we have seen some push-back, often influenced by politics.

What the survey showed is that sustainability issues do matter. Well over half the customers said that such factors needed to be considered. But also a significant portion weren’t overly concerned about them. And this number varied a lot depending on the age profile of the investor.

The message for investment managers is that there may be a need for enhanced communication and education, as well as a more nuanced approach in the fund offering. Choice should remain a key part of any investment proposition.

Out of Office? Whats’s Next for Dublin Office Property?

Property investors believe (hope) that they have seen the bottom of the Irish commercial property market.

And commercial property portfolios in Ireland today are still essentially driven by the performance of the office sector.

I looked at the property exposure of the big institutional funds, including pension funds, and the office component of these portfolios ranges from over 45% to around the 70% mark. The balance being retail, logistics and some residential.

After a sluggish start to 2024, and given significant drops in asking prices, we did see some stability in the office market at the back end of 2024. Analysts, with a positive outlook, lean on likely further cuts in interest rates and a growing local economy to support their constructive case.

So what are the numbers? How does the Dublin Office market stack up today?

Take-up of office space in 2024 was much better than 2023 but still below the long term average. Take-up was just north of 2 million sq ft. It was interesting that we saw an increase in deal size over 2023.

The Financial Services sector represented the biggest cohort of demand for space – including names such as Deloitte, Aon, BNY and EY.

The vacancy rate is bubbling around 18%, but some view this as the peak. This overall vacancy rate includes many properties that lack sustainability criteria. It’s not directly comparable, but good research from Cushman & Wakefield suggest that over 60% of Dublin office property is at risk of becoming obsolete. This is actually quite healthier than many other European cities.

A lot of new space in Dublin, as well as being best in class on sustainability grounds, also has strong cultural linkages to the local environment. 15 George’s Quay and Wilton Place are prime examples.

In terms of supply, it appears that the delivery of new office space in 2025 will be low – and much of that is pre-reserved. Prime office rents are about €62 per square foot but tighter supply could see a small rise in these levels. This leaves the current yield for prime, well located, sustainable stock at about 5%.

It seems a reasonable investment proposition, given 10 year government bond yields at 2.7% and valuations in stock markets that are fairly full.

But there are two mega-trends that property investors need to include in any assessment.

I think it’s clear now that we are past the peak in “working from home”.

Certainly many US companies (Amazon, JP Morgan) have called a halt in all their operations. Others are looking to increase the numbers of in-office days. The much vaunted Work Life Balance Act has to date mainly ruled in employers’ favour. A recent survey from Dublin Chamber showed a sizeable percentage of employers view in-office working as more productive. I suspect we may see an aggregate increase in days in the office – especially from large multi-national firms. A big driver of this will also likely be the overall strength of the jobs market. Much of the reason why WFH still holds sway is a very tight labour market. A softer jobs market shifts the pendulum away from the employee who wants to work remotely.

The second major trend that can influence the Dublin Office market revolves around economic activity, and more specifically the health of FDI flows. Recent political changes in the US, and potential changes in the global corporate tax landscape, mean that risk levels here are now more elevated. FDI has been a significant force nationally and in the capital. Any reversal here could have a major impact on supply/demand dynamics in the office market, as well as general government finances. BNY in Wexford shows how global decisions translate into local actions.

So, for investors in office property, the current numbers stack up, but it is important to be vigilant around these two major trends.

Red Flags. Are Markets Risky Now?

Maybe it’s time for investors to be careful.

The latest batch of annual outlook pieces from investment managers in the main stick to the tried and tested views of being cautiously optimistic, based on lower interest rates and still positive growth in economies. I agree we are likely to see somewhat lower interest rates and reasonable growth in some economies but that may not be enough for markets to power ahead.

Investors need to consider the level of risk in financial markets today.

I think there are a number of “red flags” out there which suggest some degree of caution.

Firstly we have come a long way and market moves have been greater that what the underlying trend in company profits has been. Almost half the advance we have seen in stock markets throughout 2024 has been driven by higher valuation not improved fundamentals. So today’s stock markets have a lot of expectations baked in.

And the moves in markets have been extreme. The advance in stock prices in the US in the past two years (at over 50%) is in the top 10% for equivalent periods in the past 100 years.

Such powerful moves and current high valuations suggest markets that may be “priced for perfection”.

Another Red Flag is the fact that the risk of a significant drawdown in equity markets has also increased. Goldman Sachs analysis shows that so far in 2025, the risk of a drawdown in share prices (which would be a decline of about 20% over a 12 month period) has increased to 30%. This is well above recent levels though significantly off previous peaks. Such risk is not reflected in stock-market volatility which remains reasonably low.

Investors also need to heed what bond markets are telling us. We may be in a regime of lower interest rates but financial conditions overall have tightened in the past month, driven mainly by bond yields. US 10 year bonds have seen yields go from 4.1% 6 weeks ago to 4.75% today. Bond investors in the US see less scope for falling interest rates than they had previously. German bonds also have moved from 2% to 2.6% in the same period. Equity investors ignore bond markets at their peril.

Another risk to be considered is the level of uncertainty about what global economic policy will look like over the next 12 months. Economic policy uncertainty (as measured by the EPU index; www.policyuncertainty.com) has soared in the past 2 months. This index is based on news coverage and it shows European policy uncertainty at an all-time high and US uncertainty driven up by lack of clarity on trade, tax and regulation. It’s hard to see a lot of this uncertainty being clarified in the near term. Added to what we know on Geo-political risk, this increases the potential for market set-backs that are hard to anticipate.

The investment landscape today is complicated. These various red flags or risks should at least be considered by investors as they look to build a resilient portfolio for the next 12 months and beyond.

China: More Risk than Return?

It used to be Top of Mind for investors.

China was an economic power house driving global markets and commodities. Posting annual growth rates of 10% and more in the early 2000’s, the health of the Chinese economy was a critical box to tick in building a positive case for financial investors.

Not any more.

2024 was a good year for investors. Global stocks rose over 20%. And this has coincided with a Chinese economy that has been mired in gloom. Official data suggests economic growth of about 5%. But the consumer has never really recovered since Covid. Confidence is low. Debt remains a huge burden. Property prices are still falling.

So can we say it doesn’t matter anymore?

As always there are two aspects to investing – risk and return. Last year may have shown that global market returns can decouple from a sluggish China. But China may still have a role to play as regards the overall risks that investors face in 2025 and beyond.

The near term economic picture is essentially for more of the same. Xi Jinping’s New Year message, while it did highlight the economy, did little to suggest renewed vigour. The measures we have seen over the past 12 months have been basically ineffective and while further policy measures may be announced in March, expectations are low.

Most forecasts point to another year of about 5% growth. Some commentators suggest that real on the ground activity reflects an economy growing at 3%. China expert George Magnus believes that the potential sustainable rate of growth for China over the next 10 years is more like 2.5 – 3%. That wouldn’t leave much wriggle room.

The China issue which garners the most headlines is Trade. Contradictory signals on possible levels of US tariffs on Chinese goods in the first few days of 2025 have led to significant wobbles in both Chinese stocks and the Yuan. If tariffs were imposed at the suggested higher levels, it could knock about 2.5% off economic growth. This would be a massive shock to a relatively fragile economy. At the very least it will be an ongoing source of volatility.

The other avenue of risk is in how the currency reacts. The Yuan has hit a 16 month low compared to the US dollar in the first few days of the year. The tightly controlled currency has reached 7.33 per US dollar, it’s weakest level since September 2023. In the past, the currency has been a source of wider volatility. Policy-driven currency fluctuation in August 2015 roiled stock markets and provoked significant capital outflows. The question will be how determined Beijing will be to defend the currency and what implications this could have for the domestic economy and financial markets.

It’s hard to paint a positive picture of the economy given the low levels of consumer confidence and the ongoing weakness in property. 70% of family assets are held in property and housing accounts for 20% of the economy. Today property prices are still falling. Sustained weakness in the economy could have domestic social and political consequences.

It will be hard to turn this around.

China still matters. And investors need to be vigilant.

But, rather than driving global growth, China looks more likely to be a source of risk in 2025.

The Central Bankers’ Christmas Party

‘Twas the night before Christmas
Snow was falling and stars were bright
The economists were all tucked up in their beds
Dreaming of all the forecasts they’d got right

But off in the distance the silence was broken
We heard glasses clink and saw lights flash
The music and mayhem could only mean one thing
It was the Central Bankers’ Christmas Bash!

The one night a year when Governors gather
But when all the decisions have been made
When they can all avail of ample liquidity
And dance the night away to Slade

It was Jerome Powell who got the ball rolling
In his tux and tails so resplendent
Ueda was asked if he wanted to sing
He said that was data dependent.

There was food and snacks from around the world
Tapas and treats guaranteed to appetize
Lagarde had brought Coquilles St Jacques
Philip Lane had brought Bacon Fries

There was no end to the drink on offer
A global range not for the squeamish
Christine sophisticatedly sipping Champagne
Makhlouf was piling into the Beamish

Tiff Macklem started swinging from the chandelier
Despite Andrew Bailey’s reprimanding
But the chandelier broke, poor Tiff flew off
Praying to God he’d get a soft landing

Then the dancing got going in earnest
All on the floor displaying such pluck
Jay Powell dancing the American Smooth
Philip Lane doing the Huckle-buck

Well next the whole gang were doing shots
And outlining all the policies they might do
Soon all their yield curves were inverted
And most of the governors too

There was no talk of monetary policy
It was just food, drink and rock and roll
As the party dragged on to the early hours
Just like inflation, it was out of control

They started to debate policy and fights broke out
Nobody was sure what they should do
Lagarde shouted “what about economies?”
They all replied “sure we haven’t a clue!”

Then Makhlouf stepped in and called for order
Let’s put an end to this brawling
For it’s patently clear, that interest rates next year,
Like the snow, will be gently falling.

Irish Investment Managers: What’s Going On?

Asset Management is a great business.

Though you might not know that from some of the numbers.

Take a look at how many of the listed fund management groups have done in the UK so far this year compared to the average stock.

Manager	Share Performance
Schroders	-27%
Aberdeen	-20%
Legal & General	-11%
M&G	-11%
Jupiter	-8%
FTSE All Share	+7%

Is it a similar story for Irish investment managers?

The headwinds facing the sector have been well rehearsed. It faces challenged revenues as pricing pressures mount, reflecting the continuous stream of cheaper alternatives such as ETFs and passive options. To this we add increased costs, especially regulatory, which can be a big issue for sub-scale players.

Investment options are getting cheaper. Even in the area of active management the average ETF fee is nearly 40% cheaper than the average fund. And the flow of money into these low cost ETFs continues at pace. With one month still to go, 2024 is set to be a new record-breaking year for the European ETF industry. The European ETF market gathered over EUR 27 billion in October 2024. This was its best month ever. Net inflows since the start of the year are EUR 188.3 billion: almost EUR 30 billion more than the full year record set in 2021. As ETFs make headway into traditional active management space, revenues can suffer. Irish ETF assets are expected to double in the next 4 years.

For Irish asset managers this fee compression is the single biggest concern, according to KPMG research.

The sector has seen huge growth – can it continue?

A recent survey of Irish asset managers predicted a growth rate close to 35% over the next 5 years. The abundance of investment platforms and the growing presence of large global players here sees a lot of asset management revenues move offshore. Other asset gathering avenues may fill some of the gap. Goodbody highlight the opportunity for investment managers in the €5 bn or so worth of wealth in the family office space in Ireland.

Another key factor in the growth of the Irish asset management industry is maintaining regulatory attractiveness. 77% of the Irish industry see it as the main driver for the future.

And the business is changing; especially with respect to technology. KPMG point out that 75% of asset management CEOs see AI as a business priority. This is a higher figure than across most industries. But only 30% of asset managers feel they could cope with a cyber attack. KPMG point out that technology investment by asset managers needs to be carefully assessed and prioritised, but cannot be delayed. The consequences for Irish asset managers lie across a range of areas including client relationships, and the efficiency of the investment and administration processes,

For many, the solution to the cost issue is scale. So we see continued corporate activity in the asset management arena. The most recent example in Europe is the possible Natixis/Generali tie up. Nearly 90% of asset management companies globally claim a strong interest in future merger or acquisition activity. Many firms are considering their “strategic options”. For example, here in Ireland, BCP, which has been very successful, is considering its future shape in this changing landscape. They have already been the subject of interest from a number of firms.

As well as outright acquisitions, Ireland is likely to see more collaborations and partnerships in asset and wealth management. 0ver 60% of Irish asset managers expect further corporate activity in the next 12 months.

Irish investment managers are deeply entrenched in the same sweeping trends that we are seeing in the industry in Europe and globally.

How individual firms fare in this wave rests firmly on where the managers sit on both the scale and the product spectrum.

Bonds: Boring or Ballistic? Time to think again?

For many investors, bonds are a substantial part of their allocation. They are seen as a stable asset class, offering some balance with other assets and reduced volatility – generally not meant to be the “exciting” part of the portfolio.

Most Balanced Managed funds here in Ireland have an allocation to fixed income. I looked at 5 of the largest fund managers in Ireland and their allocation to bonds in a balanced managed fund was as follows:

20%

29%

23%

25%

20%

So bond markets matter.

In the early part of this year, some analysts, after a period of underperformance, felt we were facing a “reset” to a more positive outlook for bonds. Many fund managers spoke of a “pivot” into bonds on the basis that we were facing into a global reduction in interest rates.

We still are – kind of.

Interest rates have been reduced and likely to fall further. But the question becomes where will they end up? Maybe higher than some had thought.

In the US a likely boost to inflation from Trump policies is probably going to slow the pace of rate cuts and the terminal rate that the US central bank ends up with, may be higher than analysts had previously thought. Markets currently think US interest rates could get down to just over 3.5%. A month ago the forecast was for a bottom rate closer to 3%.

When we add in the prospect of Trump trying to have a role in interest rate decisions, bond investors may look for some risk premium in yields.

The mood music may have changed elsewhere as well. In the UK, even as they cut rates, the Bank of England suggested that a more gradual approach to lowering rates might be needed in the future. Their chief economist also noted that geo-political risks could affect the path of rate cuts.

As for Europe, while the underlying economy needs lower rates, our own Central Bank governor Gabriel Makhlouf pointed out that monetary policy is not a sprint and that we needed to “pace” ourselves.

Recently it’s been a tough period for bond investors. We have seen more volatile moves in bond yields especially since September. In fact measures of bond volatility such as the MOVE index pushed up to new heights from the summer into early November. And in that period we have seen weaker government bond markets. Bond yields have spiked up (prices have fallen), even as interest rates were being cut. In the US for example, the yield on the 10 year treasury bond went from 3.65% in September to around the 4.3% level now. We saw similar moves in Europe and the UK.

At time of writing, government bond returns so far this year here in Europe have been broadly flat. Most Irish funds that invest in government bonds are showing no return over the past 6 months. And now some strategists in the past week, in the face of perhaps shallower or slower rate cuts, have talked of the 10 year US bond yield moving up from current levels towards 5%!

Apart from this more cautious view on the rate cycle, bond investors also have to contend with the fact there will be no shortage of bond issues in major economies such as the US, UK and Europe. Goldman Sachs estimate bond supply in Europe to reach almost €1tn. next year, as the ECB’s quantitative tightening picks up speed.

Bond managers (and investors) have many levers to pull – government or corporate, investment grade or high yield, long or short duration. Navigating through the bond landscape we now face will likely require all the available levers be used.

Time to add to Property in your Portfolio?

Is it time for Irish investors to look at commercial property again?

BlackRock, the global investment giant, last week told its clients that the outlook for property is brightening, with falling interest rates and reduced yields in other assets.

Does Ireland fit into this “brightening” picture?

Portfolio allocations to the sector have been dragged down by weak prices coupled with a lack of investment interest. Within the market itself, the first quarter of this year was especially sluggish, with an investment spend of €160 million marking a 12 year low. A pick up in the last two quarters has seen investment volumes rise to €1.3 billion for the first 9 months of the year. This is still low. By contrast average volumes over the last 10 years were in excess of €4 billion.

While the figures are dominated by a relatively small number of larger transactions, better activity leads to clearer price discovery. It is worth noting that many sales are happening at substantial discounts. Some 2024 transactions have happened at a 25% discount to already-lowered late 2023 guide prices.

Where has the money been going? In the quarter just gone, investment into retail has been to the fore, followed by office where some investors see signs of value.

The office sector still dominates most institutional property portfolios (such as pension funds) with allocations north of 60% being typical. Other sectors include logistics and to an extent residential.

We know the last few years have been tough for the office sector.

Today there are three important consequential trends to consider in this sector – two on the demand side and one on the cost side.

What is the likely direction for hybrid working? Many companies have moved to smaller spaces or restructured existing buildings for a lower attendance. This has impacted demand.

But we have seen moves from some employers who look to move back to a 5 day week. According to LinkedIn, there has been a decline in the number of both hybrid and remote job offers in the past 12 months. It appears that we may be past “peak hybrid”. Even if there is no mass return to the office, current trends may reduce the drain on the demand we have seen post pandemic.

Will foreign direct investment hold up? The technology sector, especially from the US. has been a pivotal part of office demand. We have seen some cracks in this demand profile recently. Some investment plans have been paused. Political developments in the US may also play a role here. The outlook is uncertain. FDI flows are a vital element in the future demand for Grade A office space.

Finally there’s the environmental status of already established office space. Former central banker Mark Carney has been warning of “significant stranded assets”, as many older buildings may not make economic sense to refurbish or repurpose for environmental reasons. The scale of the issue is immense. The International Energy Agency says that operating buildings accounts for 26% of global energy-related emissions. For investors, the “environmental health” and age of the property portfolio is a key metric. IPUT, for example, who have long championed their environmental credentials, highlight the fact that 67% of their office portfolio is Grade A+.

So after a multi-year decline of 25% and more for property funds – does the sector offer value?

Office property yields today are about 5%. Retail and Logistical yields are in the 5.5% to 6% range. By comparison, 10 year bond yields in Ireland are in the region of 2.6%, down from 3.2% 12 months ago. So property offers an attractive income. But with a stubborn office vacancy rate bubbling under 20%, and the very specific and substantial issues highlighted around demand and costs, it’s difficult to see capital values making much headway in the near term.

Are Irish Investment Managers charging too much?

Fees charged for managing money have been coming down. This has been a long term trend which has picked up pace. A recent global survey by Morningstar shows that over the past 4 years, management fees for all active funds in their universe have shifted down from 0.68% to 0.6%. Most of this decline took place in the 2020 to 2022 period. For comparison the same survey shows fees in the passive space stabilizing around the 0.1% mark. Other surveys also show evidence of this fee compression.

KPMG note that Irish Asset managers see this reduction in fees as the single biggest driver of change in the business. The decline has been driven by greater accessibility to lower cost options such as indexed funds and ETFs. Scale players have also played a role in the downshift of investment management charges.

And it matters. These lower fee levels have meant that investors in the US, for example, saved $3.4 billion between 2022 and 2023.

Lower revenues for asset managers are coinciding with burgeoning costs. A report from the Boston Consulting Group in the US notes that costs for US managers have risen by 80% since 2010. Costs as a share of revenue have grown from 64% in 2015 to 70% today.

Some see AI as one route to tackling this cost issue. 72% of global asset managers think AI can transform their business model – but only 16% are actually working on it.

It’s interesting to note that where costs matter, they really matter. In the passive fund space the cheapest 20% in terms of fees garner 90% of all inflows.

Some investors point to performance-based fees as a way of aligning manager and client interests. But for managers this introduces a degree of volatility into their revenues which can be challenging. For those funds, in Ireland, Luxembourg and UK. offering performance-based fee structures, the average performance fee last year slumped to just 0.09%, down from 0.54% two years previous.

Have investment management fees in Ireland come down?

Well it’s clear that the trend to passive options has seen average AMC here reduce. But it is also clear that there is a wide range of fees being charged in the market-place. I looked at Active Balanced Managed Funds with the same risk rating, and very similar asset allocations, from a number of the key providers here. Management fees charged ranged from 0.7% to 1.5%. And with total expenses clearly being higher, it’s quite a gap between relatively similar options.

There has been a dramatic fall in the average fees on investment funds globally, with a lot of the impetus coming from new entrants. But there is some sense of a stabilizing in this drive to lower fees. The most recent figures show a slower pace. This is supported by comments from Morningstar that today there is more reluctance to compete on fees.

There appears to be a reasonably wide range in fees charged by Irish fund managers for what are quite similar investment strategies. Funds rarely cut fees, though new series of a fund may carry a different cost structure. But costs matter. Key investor information documents for many of the selected Irish funds show that over a recommended holding period, typical costs can siphon around 2.4% annually from returns.

If we enter a world of more modest market returns, this could start to bite.

Back to School! What Irish Fund Managers are saying today

2024 has been a good year so far for investors. But now, as we put away the buckets and spades and head into the home straight for the year, how do Irish investment managers see market prospects?

Well, all in all, they seem to be a reasonably positive bunch. Not too concerned about recessions, expecting a string of interest rate cuts and generally seeing more upside in financial markets. Some are a bit concerned about pockets of over-valuation and nearly all talk of political risks – but not enough to spring a market meltdown.

I’ve had a look at what some of the major local players are saying.

Zurich are firmly in the camp of lower interest rates – starting in September in the US with more to come in Europe. In their view, recession fears in the US are overdone and the US consumer remains resilient. Zurich have been broadly neutral in terms of equities and bonds for most pf this year and remain so. Within equity markets their preference is for IT and financials. Zurich have always been very effective in terms of their currency calls and this is a feature of their current allocation.

Positivity also reigns over at Irish Life whose call is to remain invested as they see further upside for both equity and bond portfolios. Some softening in economic growth is likely but this will lead to less inflationary pressure and like all managers they expect interest rate cuts. Political risk in the US may be a feature but any fears over growing deficits are a 2025 or 2026 problem. However this political cycle in their view may lead to heightened volatility as we move into the final quarter of the year

New Ireland also have a constructive view on assets and express this in a clear and succinct fashion. They see the overall economic backdrop as very supportive but feel there may be some risk from the political arena as the year moves on. The risk revolves around the potential for higher tax rates and growing deficits. The fund managers believe that the beginning of a new interest cycle may mark a turning point for bond investors. One caveat they note is to be wary of a bubble in the technology sector.

However the managers at Blackrock hold a more positive view on technology and see a sustainable trend in the theme of Artificial Intelligence. Overall Blackrock feel that US recession fears have been overdone and with a brightening macro environment, it is right to stay overweight risk assets and they feel there are opportunities for investors. They suggest an overweight in US equities and a strategic overweight in Japan. A clear view on government bonds is to prefer short duration over long duration.

The AI theme is echoed over at Amundi, the European giant with significant operations here, but with a more nuanced stance. Amundi feel that there will be winners and losers in this space, and caution that the overall technology sector may need a “reset” in valuation levels, given how far it has already risen. While positive overall on equities, Amundi believe there is better value outside US mega caps. The managers here also see government and corporate bonds as attractive, given where policy rates are headed for the rest of the year. For Amundi, the “window of vulnerability” for markets is in the geo-political sphere. And while this is a long term theme, the outcome of the US election can have impacts beyond North America.

Investment management companies see their role (rightly) as providing long term solutions and are highly unlikely to advise clients to liquidate everything and head for the hills!

Nonetheless it is useful to keep an eye on what they say and the language or nuance they may use. Commentaries will rarely go full negative. Key words to watch out for though are “challenging” “lacklustre” or “headwinds”!

Based on what Irish fund managers are saying today, the message would seem to be “proceed with caution”

Big Question: Has the US Consumer run out of Gas?

Maybe the single most important question for investors.

Economists discuss, debate and differ over whether or not the US economy is headed for a recession.

Let’s put the theories to one side, focus less on Wall Street, and look at what’s actually happening on Main Street.

Just how healthy is the US consumer?

This is the key question for the US economy. The consumer, by the most recent data, accounts for just under 70% of the economy overall.

And looking at actual retail sales data up to mid-summer, the US consumer has stalled. On an annual basis, consumer spending is just grinding higher by about 2.7%. And this was helped by a better July outcome, due to a recovery in autos, following a prior slump.

But away from the official statistics, what are we seeing on the ground?

In recent weeks we have had a unique window into the state of the US consumer, as many of the leading consumer-facing companies post their earnings, results and outlooks.

And if there was one watchword to sum up how CEOs and CFOs view their customers today, it is “cautious”.

The CEO of Pepsi described their customers as “cautious and choiceful”. Demand for many Pepsi products has been subdued. The consumer is looking for value and the company is looking to respond by lowering entry level prices.

It’s a similar picture over at fast food giant McDonalds, where their most recent set of results showed an actual decline in customer revenues in North America. McDonalds are feeling the most pressure among lower income households and they expect little let up in the near future.

Marquee names such as Hershey, Heinz and Starbucks all paint a similar down-beat picture.

Home Depot, the giant home improvement company, has cut sales forecasts for this year by up to 4%. A few months back they felt revenues would be close to flat. One retailer which bucked the trend was Walmart, with its ‘every day low prices’ mantra, which is seeing better consumer numbers in 2024. But this in itself could be due to consumers trading down as they seek out value.

This cautious customer in the food and drink arena extends to sectors like travel and leisure. Airbnb is forecasting a slowdown in travel and seeing signs of a slowdown in demand from US guests. Bookings are also occurring later. The picture is similar at Hilton Hotels where management categorize the growth rate as being very, very, low, and feel the market is definitely softening.

It looks like the period of revenge travel and spend is coming to an end.

What’s behind this caution? Quite simply the US consumer is stretched. Take credit cards as an example. Credit card debt has surged. Since early 2021, credit card balances have rocketed upward by 48%, fuelled by a post-pandemic boom in services spending. And Americans are falling behind in their repayments. Delinquency rates for credit card users are reaching fresh highs. According to the New York Federal Reserve, over the last year, over 9% of credit card balances have moved into delinquency. Car loans are not that far behind. We haven’t seen levels like these in 12 years.

And while debt is up, savings are down. Last week, research from the San Francisco Fed noted that a lot of the cash savings built up during the pandemic have now run dry, and this is most prevalent among lower income families.

It’s not surprising that consumer confidence levels are off. The Michigan Survey last Friday pointed to flat-lining consumer sentiment levels and a view on current economic conditions 20% below 12 months ago.

So with low confidence, low savings and high debt could the American consumer be running out of gas?

Probably.

And the Winner is….

What’s driving the strong performance of Irish investment funds?

What’s driving the winning performances amongst Irish fund managers today? And can it be sustained?

Firstly, it’s been a good period to be invested in markets. Over the past year, Irish fund managers have on average returned around 20% in Global Equities and about 12 to 15% in a typical multi-asset fund. These are good numbers.

What types of funds are doing well? Looking at the league tables and the range of funds available to Irish investors, the increasing role of indexed funds is one stand-out. There has been huge growth in passive or indexed funds (which track a pre-determined benchmark}, compared to active funds (where the fund manager decides on stocks and sectors). Irish fund management companies and platforms offer a wide range of these low cost investing options, which have been outperforming their active counterparts over considerable periods.

In the US for example, this year so far, only 18% of active funds have beaten their benchmark. This is lower than it was in 2023 and in fact 2024 is shaping up to be the 14^th straight year of underperformance for actively managed funds. League table numbers here at home show a similar picture.

One thing which I think has helped index funds in the past year, especially in the global equity space, has been a significant exposure to US equities, and consequently to many of the large cap technology names. The US market has powered ahead in the past 12 months with returns close to 25% -double what has been achieved in Europe. The MSCI World index today has over 70% exposure to the US. Index managers are not concerned with what may look like daunting valuations, which might give an active stock picking manager pause for thought. This US performance boost has been especially notable in those global index funds which exclude Eurozone equities.

Investors should note not all index funds are the same. One of the best locally managed global equity funds which has returned 36% over the past 12 months – a very strong performer – is indexed. But this fund specifically tracks about 50 of the biggest stocks on the world’s markets. The result is today nearly 85% of the fund is invested in US stocks, and nearly 40% is invested in one sector – technology.

So performance has been exceptional, but has been very dependent on one market and indeed on one sector.

Indexed funds haven’t had it all their own way in Ireland. Some actively managed funds have delivered exceptional returns for their investors. With returns of over 30% in the past 12 months, a number of quite concentrated global equity funds, with a smaller number of holdings, researched and selected by the manager, have done significantly better than their indexed counterparts. Worth noting that these active funds carry a higher cost and there is always a risk that the manager makes the wrong calls.

So while some actively managed funds have excelled, there has been a strong tailwind behind many indexed options in the shape of high US equity exposure – very high in some cases – in the past year.

Investors have enjoyed exceptional returns but may need to consider what risks (very heavy in one market and one sector) they may now be taking on.