16th January 2026
As teased by Ben Mackie in his Review of 2025 last week, here is our outlook for the year ahead. There will no doubt be lots of investment outlooks that use the oxymoronic “cautiously optimistic”, but we are categorically optimistic!
It might seem odd being bullish when there is plenty of press coverage of AI bubbles, fiscal largesse, sluggish economic growth, stubborn inflation and geopolitical risks. If we only invested in global market-cap weighted equities or global government bonds and corporate bonds from the largest issuers (as many passive multi-asset investors do), then we might be more concerned. But we are truly multi-asset investors with loads of attractively valued areas in which to invest. This point was made recently by the excellent Ben Inker at GMO in his 4Q 2025 Quarterly Letter (link here). Inker compares the current AI bubble (and he believes it is a bubble) to the 2000 Internet Bubble observing that they are both very narrow in their respective areas of overvaluation. This contrasts with the much broader bubbles of the Great Financial Crisis in 2008 and the Everything Bubble in 2021; when they burst there were few places to hide. The structure of today’s market with lots of passive flows funnelling capital into a very concentrated area of global equities (mega cap US tech companies) is leaving plenty for agnostic investors to invest in that should still generate attractive total returns whether the AI bubble bursts or not. That is exactly how we are investing with very low allocations to US equities and zero exposure to the so-called Magnificent 7 stocks in Vanbrugh and Distribution (we just have the BlueBox Global Technology fund in Global Opportunities).
Actively managed funds investing in equity markets outside the US remain good value even though they have rerated from a low base a year ago. The precious metals sector has been a very big contributor to our returns in 2025, but we believe the conditions that led to last year’s stellar returns are still in place today and we remain exposed. In fixed income, even though credit spreads across the asset class are at or near record tight levels, the all-in yields are attractive and imply a likelihood of positive prospective total returns, especially for actively managed funds able to invest beyond the mainstream (see link here to Dan’s recent ‘Spread ‘em’ crescendo). In addition, while government bond yield curves could steepen further to reflect the market’s concerns over the lack of fiscal prudence in the largest economies, ‘risk free’ yields at the short end are high enough to offer diversification benefits for the first time in ages.
And then we have the investment trust sector where we believe we are on the cusp of some great returns as the headwinds of the past few years ease. The discount for the sector as a whole (ex 3i) has remained at the current c.15% level for the last 4 years, the longest period it has remained this wide, disproving those who view the sector’s malaise as cyclical. As Ben Conway wrote in his year-end summary (here), there are plenty of reasons for optimism. Chief among them is the news that investment trusts are no longer subject to the erroneous aggregation of their expenses that we hope will bring large swathes of the investment community back to the sector. Alternative asset classes like private equity and parts of the infrastructure sector are priced very attractively at the current wide discounts but look even more attractive now that they don’t incorrectly inflate the ongoing costs of the funds that own them. We hope some new buyers will come in and increase the demand side of the equation and we expect more self-help initiatives to resolve the oversupply. Last year saw plenty of corporate activity that we think is merely a springboard for an M&A boom in the coming year(s).
Last year’s M&A in the conventional trusts was mostly uncontroversial. As recently introduced conditional tenders, continuation votes and exit opportunities start appearing on the horizon, discounts should narrow and the weakest will naturally fall by the wayside bringing supply and demand into equilibrium at tighter discounts. On top of that we have activists with increasing ownership on many shareholder registers that will not be shy in recommending drastic action.
However, the alternative space still needs a lot of attention and should keep the various corporate finance teams very busy over the next year. Although the HICL and TRIG merger didn’t succeed, that alone shouldn’t dissuade other boards from doing deals provided lessons have been learned from that episode. As we said previously, both these boards were well-meaning and looking to find a solution to meet the needs of today’s largest investors who demand scale and liquidity. Investment trusts must ensure relevancy alongside LTAFs and other semi-liquid private funds that are able to receive large inflows (even if they can’t guarantee a full exit quickly). While HICL’s proposed mandate drift into renewables was a huge stumbling block, and HICL shareholders understandably blocked the deal, we think everyone needs to be more open-minded and imaginative when it comes to potential corporate transactions, especially in the renewable infrastructure sector where there are too many similar and sub-scale trusts. Ultimately shareholders must not let perfect be the enemy of good.
Shonil Chande at Panmure Liberum has written a tremendous and very in-depth research note (tome) on the renewables sector that we managed to read during the quieter days of the Christmas period. He makes some very good points about why the sector is unloved (too many moving parts, inconsistent reporting, government intervention and poor disclosure) and what boards and managers could and should do to help investors get comfortable with the sector again. Like us, he believes the sector needs to move on from being regarded as a pure bond proxy given the recent record of NAV and dividend cover erosion, and be allowed to reinvest in certain projects that will generate NAV growth. Such a transition will likely require a dividend cut and/or an adoption of a new strategy such as a broader investment mandate that might be painful for the shares in the short term and therefore will need very understanding shareholders to succeed. Given the current discounts, high yields and scope for more corporate activity, and maybe lower interest rates, we find it hard to envisage the sector trading on a wider discount this time next year.
Even though our Hawksmoor funds had excellent absolute and relative returns last year with their unit prices hitting all-time highs in December, we have enough value in the underlying portfolios to feel confident for another good year for our investors.
Daniel Lockyer – Senior Fund Manager
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