Steering a different course in financial markets
Wise words I got from a wise person and she got them from Samuel Beckett, but she dances and thinks and I struggle with both. So anyway this is a bit of a grand jete for me into a world where I probably don’t belong but you’ll have to deal with that. All my working life has been in financial markets and investing and there is so much rubbish spoken and written that I hope this is a bit different – well a lot different. Anyway I’ll work it out as I go along with help from my friends.
It was the night before Christmas
And all the stock markets were closed
Fund managers finally got to rest
And the Traders gently dozed
No more economic forecasts to be made
No more commentaries to write
For all the world’s financial folk
It was a truly silent night
But off in the distance you could hear music
The beats were pounding loud and clear
For all the Governors were gathering
For the Central Bankers’ night of the year!
That one night when Central Bankers get together
For a huge feast of craic and celebration
When they can forget all their usual worries
Like systemic risks and sticky inflation
All the Governors came from around the world
They battled through sleet and through snow
Determined to have the night of their lives
While still keeping interest rates low
It was Jay Powell who got the ball rolling
He decided to start with a song
He said I might just go straight to the chorus
‘Cause I may not be around for that long
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
Christine also brought sumptuous escargot
Ueda-san brought sushi and sole
Andrew Bailey felt a bit out of things
With his spotted dick and his toad in the hole.
Now at a table for former governors
Downing shots of Jagermeister and Sambuca
Greenspan held on tight to his punchbowl
While Draghi played with his big bazooka
Well the liquidity taps were now fully on
And I don’t mean M1 or M2
There was Stella, Heineken, Asahi and Peroni
Not to mention Carlsberg Special Brew.
Every Governor had their favourite tipple
Jay Powell had Bourbon 80 percent proof
Lagarde slowly sipped Dom Perignon
A crate of Guinness for Gabriel Makhlouf
Well the food and drink were flowing
And the bar tab started to soar
They wondered have we the money to afford this
If not we can always print more
But it was getting quite chaotic
There was no hint of a seating plan
And the governor from the Bank of China
Was sat with Ueda from the Bank of Japan
Well the night descended into mayhem
The food and drink had taken its toll
And just like financial asset inflation
The party was out of control
But all too soon it was time to go home
Back to their desks and their economic projections
For the Governors, like next year’s interest rates,
Were all headed in different directions
So the Central Bank of Ireland has produced a very solid research piece providing a snapshot of what Irish investors want and where they are putting their money.
Firstly it’s a lot of money!
The net wealth of Irish households has more than doubled in the last decade to €1,288bn.
The headline conclusions from the research don’t come as much of a surprise.
Compared to our European neighbours, we are quite a conservative bunch, with almost 40% of our financial assets in cash compared to an average 30% level elsewhere. We are much closer to Poland and Cyprus than we are to Denmark and Sweden.
When it comes to moving up the risk scale and investing directly in stocks, bonds or investment funds, we are at a significantly lower level than our neighbours. Irish households hold just 2.3% of their financial assets in direct investments such as listed equity and debt securities, compared to the EU average of 7.5%.
Where we do stand out is our holdings of pension funds, which in turn would be invested across different asset classes. The figure for Irish households is relatively high when compared with some other EU countries, though it is well behind other international comparators including the UK and the US.
Why are we relatively so cautious?
Interestingly a lot of it may have to do with our history. For generations, access, awareness and participation in capital markets was seen the preserve of a small community of wealthy investors. So it was a “not for the likes of us” factor for many.
Then from independence in 1922 up to the late 1960s, the Irish economy experienced a long period of economic stagnation, and our living standards lagged well behind our European neighbours. Even when things dramatically improved, we experienced periods of financial instability and crisis (boom-bust cycles), such as the 2008-2013 economic and financial crisis.
This history and experience is casting a long shadow on our financial behaviour.
When you drill into the responses of investors and non-investors provided in the Central Bank research, confidence and attitude to risk emerge time and time again.
In the answers to questions on what the motivations to start investing were, factors like a sense of achievement or making quick money are way down the list. The single most important motivation is quite conservative – to increase savings for retirement. And when we look at investment goals, again pensions and healthcare needs are top of the list.
How do investors think about risk? Again our conservatism comes to the fore. Nearly 70% of investors state they want moderate risk and will accept moderate returns. In fact 20% say they would be happy with low return if it came with low risk. “Shooting the lights out”, as an investment strategy, seems to only appeal to 1% of investors surveyed.
What’s the biggest reason for those who are not currently investing? While not having enough money is up there, the biggest thing holding people back is fear of losing money. There is also an undercurrent of not trusting financial institutions in many of the answers.
Risk aversion is not limited to those who already have assets invested – but is also a factor for those who don’t currently invest.
So what are the take-aways for the industry from this perspective of what investors want?
It’s not about increasing the range of product available – nearly 70% of respondents already feel overwhelmed by what’s on offer at the moment.
If we want to increase the overall level of investor participation, the answers lie in growing the knowledge and understanding of how investment can play a role in financial well-being.
This knowledge, together with enhanced confidence and trust, can make for a more active and, crucially, resilient investor.
It’s not a quick fix.
What’s top of mind for investment managers today?
There’s clearly a lot to consider. On the positive side, economies are holding up (for now). Company profits seem resilient, interest rates may have further to fall, markets have been making all time highs. But on the other hand, there is unprecedented uncertainty around issues like trade and huge geo-political risk, not to mention active conflicts in Europe and the Middle East.
How are investment managers making sense of it all?
Two recent pieces of research give us a glimpse into what’s dominating investor views and actions. One is a Morningstar survey of Pension funds, Chief Investment Officers , Sovereign Wealth Funds and others around the world. The other is a very useful report from the Central Bank of Ireland on how Irish investment funds have been responding to recent events.
Morningstar surveyed 500 investment managers around the world.
The biggest single issue for the world’s investment managers is what’s happening with global trade and the potential economic and asset fall-out. 76% of investment managers see this as the key concern. In China it’s the key concern for almost 100% of all respondents.
How the US Administration develops and implements overall policy is also high on the agenda for those managing the world’s financial assets. For many, these concerns morph into topics such as market volatility and the future of the US dollar. While other issues such as fiscal debt or Ukraine and the Middle East are on managers’ checklists, they are further down the list and currently seen as manageable.
Presumably Irish investment managers assess the financial environment similarly.
So have they taken any action on foot of these concerns over the volatility and impact of US trade policy?
The Central Bank of Ireland has done solid work in looking at how the Irish financial sector responded to the sudden increase in US economic policy uncertainty in April 2025. Their conclusion is that investment funds, banks, insurance companies and pension funds did not significantly reduce their exposure to US assets over this period. There is however some evidence of increased currency hedging activity by the Irish financial sector as they looked to protect against any dollar weakness in the light of higher uncertainty. As we look to further interest rate cuts from the US Central Bank, such hedging decisions will continue to matter.
Is ESG currently still on the agenda for investment managers? This also emerges in the Morningstar survey. More than half of the asset owners surveyed believe sustainability factors have become more material in their business in the past 5 years. Regionally, Asian managers have seen the biggest growth, (with China topping the table), followed by Europe.
Perhaps not surprisingly the views on issues such as sustainability or inclusion in the US remain sharply divided. Significantly less than half the asset owners in the US see growing interest in sustainability related investment. The stance and statements of the Administration, revised mandates from many public sector funds, and the views of key players in asset management have all played a role in getting to here. We are unlikely to see any reversal of this trend in the US soon.
In sum then, what happens in the US as regards policy and politics, both internally and externally, is what’s capturing the world’s investment managers’ attention today.
Deciding where to invest isn’t easy.
Should it be in stocks or bonds? Should you consider property or maybe alternative assets like private equity or credit? What about including an environmental aspect to your investment planning?
But even when you think you’ve got that figured out, there’s the question of who you invest with. This can often matter more than how the asset you’ve selected actually performs. The gap between how a successful and a poor investment manager perform when they both have precisely the same mandate can be significant.
As an example, using MoneyMate statistics, I looked at managers specifically in the Global Equity sector over the past year. I further filtered the data to examine funds within similar risk bands to ensure comparing like with like.
These star ratings are a quantitative assessment of a fund’s past behaviour over a five-year period. Funds are also assessed within risk profiles based on their volatility. This mean we’re not comparing low volatility funds with others who are shooting for the stars.
The results are shown below.
| 5 Star | 4 Star | 3 Star | 2 Star | |
| Best | 10.6% | 17.5% | 12.4% | 15.3% |
| Worst | 0.3% | 4.3% | 3.3% | 0.8% |
| Gap | 10.3% | 13.2% | 9.1% | 14.5% |
(12 months returns Source MoneyMate)
Even over the relatively short term of 12 months, the difference between choosing a successful manager and a poor one was between 9 and 14%.
These are really material differences.
As always there are reasons behind the story. In this particular period, some funds which highlighted dividend yield or dividend growth lagged behind. Managers who emphasised smaller stocks also underperformed. The winners, on the other hand, often had significant exposure to growth type stocks or regions, Other top performing funds benefitted from judicious currency hedging.
Bottom line is there is a wide range of outcomes within a reasonably narrow sector – and I suspect there always will.
It’s also worth noting that these differences in performances far outweigh any difference there might be in the costs that the manager may charge. The gap in what managers charge is likely to be less than 1%.
This highlights a few things:
This year the average Irish Pension fund peaked in February, and is only now clawing its way back to that level. In the mean-time, it had slumped by about 15% from that peak until it bottomed in early April, recovering all the lost ground.
So year to date the average pension fund is just now edging into the positive, up around 2 or 3%. Funds are grinding out a result
It’s more Brentford than it is Arsenal.
Yet we continually hear of the markets – especially the US stock market – making new highs. The market headlines point to an S&P index up nearly 14% in 2025 so far. In Germany, shares are up close to 20%. In Japan, the Nikkei is ahead by about 13%. But we don’t see this is in the funds.
So a few things.
Making new highs requires only a move of 0.01% in a market, so maybe not to read too much into that. Secondly (and more important) the US stock, market for a European investor so far this year, is up just about 1%. This is because the US dollar has been weak and pulled back returns.
And US stocks matter the most in the average Irish pension fund. An average pension fund today will have just over 70% invested in stocks. The balance will be in other assets like bonds, property cash etc. Of this 70% in stocks, almost 70% is exposed to the US market. So basically half the assets are in US stocks – and in the US dollar. It’s quite a concentration in one asset – and one currency.
Do managers hedge away this currency risk? Some do. Some don’t. Some hedge away a portion of it. And there are years when it doesn’t matter and there are years when it does. It matters in 2025.
So where do we go from here? Future direction in interest rates is key. Consensus thinking is probably that the ECB may pause with rate cuts, while the US Central Bank (with gentle persuasion from the President) may embark on a series of further reductions in interest rates. This might suggest further weakening in the greenback. However the Fed might also hold back on these cuts if it felt that tariff-induced inflation was on the horizon.
Currency forecasts are notoriously tricky, but as we have seen, currency moves can have dramatic impact on fund returns – and ultimately Irish pension funds face liabilities in euros.
Fund investors should look to well-diversified portfolios – diversified over assets but more importantly diversified over risks.
And currency is one of those.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
‘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.
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.
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.
Tradewinds 