For 2025 we intend to continue our recent successful investment themes for our client portfolios. The majority of bonds in these portfolios are currently denominated in U.S. dollars and most in the financial sector but overall, they remain well diversified. This approach has proved particularly successful despite the problems of American regional banks and the Credit Suisse Additional Tier 1 write down debacle in 2023, both of which we were not involved with.
We believe that active fund management is important to the successful running of all our client portfolios. Coping with market news and events can only be handled with fast and decisive decision making followed by appropriate trading. The ability to trade positively and quickly is always dependant on the liquidity of individual bond holdings, which we have always believed important. We think that with the lower yields ahead there could be some reinvestment risk in shorter maturity bonds. To alleviate this potential problem, we have increased portfolio durations by selling shorter dated credit that is maturing in the next year or so to switch into longer maturity bonds. The changing shape of the yield curve over the last few months has also been a driving force to push portfolios to buy longer duration credit. The Treasury yield curve flattened over the last few months after being inverted for most of the last two years. Since 2022, inversion, an unusual scenario, meant yields on shorter-term Treasury securities were higher than those of longer-term securities. During the second half of 2024 the curve began to ‘normalise’ by flattening. We have gradually reduced credit risk all year. We continue to search for other investment opportunities in a wide variety of geographical areas, sectors, and companies. Research remains at the heart of our investment strategies for portfolio creation and ongoing management.
We continue to believe that major central bank interest rates will be lower at the end of 2025, but getting there could now be a slower process than was thought by most market commentators only a few months ago. Certainly, events last year included upward pressure in US inflation figures which slowed the drive to cut rates, with central banks putting rates on pause. Despite the deceleration in the lowering of rates in the last months of 2024 we think the downward direction is still set, but it might take longer to reduce. Certainly U.S Federal Reserve policy in 2025 will depend on economic data. Key metrics to watch include inflation and the labour market.
All fund managers have had to cope with the momentous politics of the past year. In the UK the Labour Party won power after 14 years of Conservative Party rule and America saw Donald Trump elected for a second, albeit interrupted, term. Neither event stopped their equity markets from gaining ground. Sovereign bonds of both countries also saw gains with yields falling. Stubborn inflation did slow central banks from lowering their rates at the speed expected earlier in the year. Despite this slowdown of yield movements, they were still reduced by the end of the year. Leaving aside political risks, we believe the economic backdrop remains benign. Inflation has moved in the right downward direction and interest rates are falling in the U.S., UK and Europe. We expect a soft landing, and our expectation is that growth will reaccelerate as we move through 2025.
Last year all our client portfolios beat major credit bond indexes, including the Bloomberg Bond Fund index and Pimco’s market bellwether the Pimco Total Return Fund, by some distance. We believe we are staring 2025 with a strong foundation. With yields at attractive levels and the Fed in a supportive, rate-cutting cycle, corporate bonds are well-positioned to generate healthy returns. We remain optimistic that the year ahead will continue the portfolio successes of the last few years.
Trevor Cooper FCSI
Chief Investment Officer and Director
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