5 funds to watch in 2025

Actively-managed fund looking to harness trends in the US economy

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The change of US president will bring about a change in US policy. One of the most talked-about is the increased tariffs which will be applied, particularly in relation to China. While tariffs are seldom a good thing for growth overall, they could potentially be good for US smaller companies. Why? Because trade tariffs favour domestic businesses over international conglomerates, and smaller companies are usually more domestically focused. Combine this with a more supportive monetary policy stance and we believe this year could be a good time to invest in domestic-facing US corporates.

One way to achieve this is through the Artemis US Smaller Companies fund. The experienced Cormac Weldon has managed it since its launch in 2014. This fund seeks out smaller companies with good potential for their share price to grow relative to the risk of the business. We like the way the manager considers how the US economy is performing to identify sectors that are benefiting from trends, as well as the areas that are finding things tough. We believe this should help the fund take advantage of new or changing policies put in place by the new president.

The fund aims to deliver long-term growth by investing in smaller companies based in the US. Smaller businesses are often among the most innovative and offer lots of growth potential, but they're higher risk than their larger counterparts. The fund usually consists of 40-60 companies. Holding a smaller number of investments can also increase risk, as each has a larger impact on performance.

Investors should note that, of the 100 funds that our analysts research on an ongoing basis, this is one of the most carbon intense. The companies within the fund may face increased scrutiny from investors and regulators, as well as higher costs associated with carbon emissions management and potential carbon pricing mechanisms. This could potentially impact the fund’s performance.

Investments ranging across shares, infrastructure and bonds

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This fund invests across three broad investment areas: shares, real assets (such as infrastructure and property) and bonds. We believe this could help it take advantage of several themes emerging for the year.

Infrastructure assets could benefit from increased government spending, both in the UK and overseas. This is particularly true for any assets linked to renewable energy, as the transition to a more sustainable economy starts to accelerate. This fund invests in several trusts which own and operate renewable energy infrastructure. For example: Greencoat UK Wind, which operates onshore and offshore UK wind farms in the UK; The Renewables Infrastructure Group, operators of on- and offshore wind farms and solar parks in the UK and Europe; and Foresight Environmental Infrastructure Ltd, whose portfolio includes wind farms, waste management & bioenergy projects, solar parks and hydro plants.

The bond portion of the fund is focused on generating income and is focused on corporate bonds. This can include high yield and emerging market bonds. These bonds usually pay a higher income, but they're also higher risk. In a declining interest rate environment this portion of the fund could perform well, although higher-yielding bonds have often been less sensitive to interest rate changes than higher-quality bonds.

The shares portion of the fund is made up of large companies that the team expect to be able to pay and grow their dividend a long way into the future. These could be more resilient in tough times, although there is no guarantee, and dividends can go down as well as up. The fund can invest in emerging markets and use derivatives, which, if used, increases risk. It takes its charges from capital, which can increase the yield but reduces the potential for capital growth.

Actively-managed with exposure to the wider bond market

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The US Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) all cut interest rates in 2024, and the market expects further cuts in 2025. We’ve seen inflation rates fall faster in some countries than others, but in many markets, they’ve reached or are close to their targets. In this environment we expect bonds to perform well. The economic outlook is far from certain, and we therefore favour either high-quality bonds or, better still, choosing an active manager who can manage interest rate and credit risk for you.

The Invesco Tactical Bond fund fits the bill nicely in our view. The fund is co-managed by Stuart Edwards and Julien Eberhardt who took over running it in August 2020 and August 2021 respectively. Both managers have been part of the fixed income team at Invesco for well over a decade and have contributed investment ideas for a number of years.

They can invest in all types of bonds, with few constraints placed on them. This includes high yield bonds and derivatives, both of which add risk if used. The performance of the fund hinges on their ability to interpret the bigger economic picture, and they can alter the fund's investments based on what they see. They aim to shelter the fund when they see tough times ahead, and seek strong returns as more opportunities become available.

We think this is a good fund for exposure to the wider bond market. It takes away the hassle of deciding which type of bonds to invest in and when, because the managers are given the discretion to make these decisions for you. Over the long term the aim is to deliver a total return, through the combination of capital growth and income, rather than focusing purely on generating a high yield.

Passive fund with a focus on environmental, social and governance strengths

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Emerging markets is a broad term covering hugely diverse geographical areas. From India to China, Vietnam to Mexico, their economies and stock markets are all at different stages of development. Some are rich in oil, gas and precious metals, others supply the world with coffee and cocoa. Their political regimes vary hugely and so do their demographics.

As younger economies, many offer the potential for high levels of growth. This may come with higher levels of volatility, though.

Some markets, such as India, have seen huge economic growth in the last few years. Combined with a change in who invests in the stock market, this has led to rising share prices. While the market now offers less value, it’s still possible that it could grow faster than other more developed economies. This said, we think the market is likely to see some volatility in the shorter term and there are no guarantees.

Other markets, like China, have benefitted from government intervention. The stimulus in China in the second half of 2024 saw the market rise, although whether this effect is long term remains to be seen.

To spread the risk of investing in emerging markets, we feel a passive fund could be a good option. This fund invests across a range of emerging markets including Taiwan, China, India, Korea, South Africa and Brazil. It also tilts its holdings away from companies that score poorly on environmental, social and governance (ESG) criteria and towards those that score well. This could be an advantage in emerging markets, where risks can be higher. In addition, the index that the fund tracks targets an annual reduction in its overall carbon emissions.

That said, of the 100 funds under research coverage, this is currently one of the most carbon intense. The companies within the fund may face increased scrutiny from investors and regulators, as well as higher costs associated with carbon emissions management and potential carbon pricing mechanisms, potentially impacting the fund’s performance.

As a tracker fund, it simply aims to track the performance of the ESG-tilted broad emerging markets benchmark rather than try to outperform it. It’s a low-cost way to get exposure to potentially higher-growth emerging markets. The fund’s portfolio can include some smaller companies, which increases risk.

A defensive mindset with a focus on gold

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Geopolitical risks remain high, with tensions in the Middle East escalating, and the Russia-Ukraine situation far from resolved. That’s not to mention trade tariffs and rising tensions between the US and China. In times of uncertainty one investment which tends to do well is gold. This is because it often acts as a safe haven. It had a fantastic run in 2024, rising 29.27% in the 12 months to the end of October 2024. While we wouldn’t necessarily expect returns to continue at this pace, the uncertain outlook combined with increased buying from central banks, particularly in emerging markets, means that the commodity may well continue to enjoy support. As always, past performance isn’t a guide to the future.

The managers of the Troy Trojan fund manage to take advantage of the attributes of gold without putting all their eggs in one basket.

Sebastian Lyon and Charlotte Yonge aim to shelter investors' wealth just as much as grow it. Rather than trying to shoot the lights out, the fund aims to grow investors' money steadily over the long run, while limiting losses when markets fall. It tries to experience smaller ups and downs than the broader global stock market or a portfolio that's mainly invested in shares.

The fund is focused around four 'pillars'. The first contains large, established companies Lyon and Yonge think can grow sustainably over the long run, and endure tough economic conditions. The second pillar is made from bonds, including US index-linked bonds, which could shelter investors if inflation rises again. Some of the fund is also invested in traditional UK government bonds (gilts). The third pillar consists of gold-related investments, including physical gold. And the final pillar is ‘cash’. This provides important shelter when markets stumble, but also a chance to invest in other assets quickly when opportunities arise.

The managers have tended to focus on companies based in developed markets, such as the US and UK. This includes some of the world's best-known companies with highly recognisable brands. The manager has the flexibility to invest in smaller companies, which, if used, adds risk. The fund is also concentrated, which means each investment can contribute significantly to overall returns, but it can increase risk.