The week that was …
Economic round-up
* The S&P Global UK PMI Composite Output data rose from 50.4 in December to a three-month high of 50.9 in January, showing the UK economy remains “largely stalled”, but “continues to avoid recession by a narrow margin”. Business optimism about the year ahead was downbeat, however, while the survey’s price indices indicate inflationary pressures may be re-emerging. Read more from S&P Global here
* UK wages continued to show robust growth over the three months to the end of November, rising 5.6%, though there was a decline of 47,000 in the number of people in work, according to the Office for National Statistics. The number of job vacancies fell by 24,000 for the 30th consecutive month.
* UK consumer confidence dipped significantly in January, falling to its lowest level in more than a year. It fell 5 points to minus 22, as a rise in government borrowing costs and warnings of job cuts took a toll on economic sentiment. Read more from the FT here
Markets round-up
* The S&P 500 reached record levels on 23 January following a speech in Davos by incoming US president Donald Trump calling for lower interest rates, and suggesting his tariff regime on China may not be as onerous as initially thought. Read more in ‘In focus’ below
* Net retail sales of investment funds saw positive inflows in November 2024, hitting £1.6bn, according to Investment Association data. After some recovery for inflows into UK funds last month, however, outflows from the main UK sectors resumed. That said, flows out of the UK All Companies sector were £552m – the best showing since the £445m outflow in August 2021.
* Calastone data painted a similar picture. It reported assets in mutual funds globally jumping to $9.4tn (£7.5tn) to a record $78.2tn in 2024, up 13.6% year on year. Global and North American funds were the big winners, but once again UK-focused equities were at the bottom of the heap, shedding $13.3bn in 2024.
“A bombastic US president with an ‘America First’ policy is leading to in-depth discussions regarding our US exposure, particularly those areas that will benefit from a domestic tailwind, such as small and midcap equities. It is important to take a breather and contemplate what this means.
Selected equity and bond markets: 17/01/25 to 24/01/25
Market 17/01/25(Close) 24/01/25 (Close) Gain/loss
FTSE All-Share 4624 4617 -0.15%
S&P 500 5996.7 6101 +1.74%
MSCI World 3788 3856 +1.8%
CNBC Magnificent Seven 346.4 352.2 +1.67%
US 10-year treasury (yield) 4.630% 4.634%
UK 10-year gilt (yield) 4.67% 4.64%
Investment round-up
* Herald Investment Trust secured victory against Saba Capital’s plans to seize control, with the US hedge fund securing just 0.15% of non-Saba shares. The AIC called it a “victory for shareholder democracy”. Saba has requisitioned votes at a further six investment trusts, which will take place over the next few weeks. Read more in ‘In focus’ below
* European ETFs saw their highest quarterly inflow ever in the fourth quarter of 2024, with inflows topping $90bn. This was more than $20bn higher than the previous new record, set in Q3. Read more from Invesco here
* Natixis Investment Managers agreed a tie up with the asset management arm of Italian insurer Generali. If the deal goes ahead, the deal would create the largest European asset manager by revenue, with €1.9trn (£1.6trn) of assets under management. Read more from Morningstar here
* AJ Bell Investments has removed its allocation to alternatives in its 2025 strategic asset allocation for MPS products. The group said it had concluded alternatives do not provide adequate diversification to portfolios and so it would stick to a combination of equity, cash and bonds. Read more from Trustnet here
… and the week that will be
Q4 earnings season kicks off
The Q4 earnings season kicked off last week, with major US banks posting strong results, driven by trading revenues and fee income. Reporting is gradually ramping up, with many of the technology giants – Apple, Microsoft, ASML, Meta, Tesla – plus industrial names such as Boeing reporting this week. Financials and utilities have been the areas to watch, seeing upgrades in consensus revisions ahead of the reporting season. Perhaps the key area to watch, however, is whether earnings growth is broadening away from the mega-cap technology names. The impact of the recent rise in the US dollar will also be a significant factor. Read more from Interactive Investor here
Chinese New Year
Wednesday sees China usher in the Year of the Snake, which is styled as a year of ‘regeneration and renewal’. Investors in China will certainly be hoping the country’s markets can shed their recent run of weak performance. The market rallied after the stimulus package in September last year, but has made little progress since and is still behind its level of three years ago. There are more encouraging signs for China at the start of this year. A robust fourth quarter of economic growth tipped GDP growth over 5% for the year – the target level of the Chinese government. The country’s National Bureau of Statistics hailed the country’s recovery, with manufacturing and exports showing particular strength. Read more from the FT here
The week in numbers
Monday, 27/01/25 – China PMI: Consensus forecasts manufacturing index will rise to 50.3 from 50.1 and services to fall to 51.8 from 52.2.
Wednesday, 29/01/25 – Fed rate decision: Consensus expects rates to be held at 4.5%.
Thursday, 30/01/25 – US Q4 GDP: Consensus expects 3.1% growth, up from 3%
Thursday, 30/01/25 – Eurozone Q4 GDP: Consensus forecasts are for year-on-year growth of 1.2%, up from 0.9%
Thursday, 30/01/25 – ECB rate decision: Consensus expects rates to be cut to 2.9%, from 3.15%.
In focus: ‘Saba saga’
Shareholders gave a resounding thumbs-down to Saba Capital’s plans to take control of the Herald Investment Trust. The AIC called it a ‘victory for shareholder democracy’, with 99.78% of all votes cast by non-Saba shareholders going against the US hedge fund’s resolutions. Saba’s involvement in the UK investment trust sector is, however, far from over.
Six other trusts still face votes over the next two weeks on whether or not to accept Saba’s proposals – Keystone, European Smaller Companies, US Growth Trust, Henderson Opportunities, Edinburgh Worldwide and CQS Natural Resources Growth & Income – and these votes may be a tougher fight. Herald had a large and loyal shareholder base, including significant holdings with a number of supportive brokers. A more disparate and less engaged shareholder base could still see Saba triumph at the other trusts.
If shareholders do not engage, they may end up with something very different to the investment they bought. In his recent webinar, Boaz Weinstein, founder of Saba, took aim at journalists and analysts who have criticised the record of his US funds, suggesting they were distributing “intentionally misleading information about fees and track record”. Still, those journalists and analysts have used the publicly available information on Saba’s existing funds and Weinstein has yet to provide any significant clarity on his alternative proposal.
For their part, analysts at Investec noted: “While the devil is supposed to be in the detail, the latter is conspicuous by its absence. Just how are shareholders expected to make an informed decision with Saba failing to provide even basic information on key fundamental issues including their own track record, future portfolio exposure, fee arrangements, liquidity options and discount control mechanisms? The paucity of information suggests strongly to us that Saba is relying on investor inertia, rather than the strength of its own arguments, for the resolutions to succeed.”
Someone who had intentionally bought into, for example, a high-growth technology strategy, such as the US Growth Trust, or a small and midcap-focused natural resources fund, such as CQS Natural Resources Growth & Income, could soon find themselves in a global hedge fund strategy with very different investment parameters to their original investment. “Saba characterises the boards as ‘bad actors’ but provides an undefined exit option of their own,” observed Robert Fullerton, senior research analyst at Hawksmoor.
“Saba votes on behalf of their own clients and presumably knows this. The mandate change has also not really been made clear, beyond generally into investment trust discounts.” This lack of clarity has prompted an overwhelming recommendation from proxy voting organisations and investment trust analysts to vote against the proposals in full.
The boards of the investment trusts have also come under fire from Weinstein, who has perceived “an ecosystem of greed”. Part of his proposal is to replace them with “highly qualified directors” – including, in one instance, Weinstein himself. Here, the Investec team said: “The proposals suggest a distinct lack of understanding, bordering on contempt, of the AIC Corporate Governance Code, which provides a framework of best practice, or of the expectations of current shareholders based on a corporate governance model that has evolved over the long term. The potential conflicts of interest are material and crystal-clear. We note the AIC Code states that representing a significant shareholder is likely to impair a director’s independence.”
Such issues have been raised with the FCA but it has so far limited its involvement to urging platforms to ensure shareholders understand how to vote and why they should. While most platforms have sought to engage shareholders actively, it is notable that Scottish Widows and two other investment platforms have blocked shareholders from voting on Saba’s plans, saying they do not consider the votes to be “corporate actions”.
The FCA will arguably need to address a number of longer-term questions emerging from this saga – for example, the way Saba has kept its shareholding under the 29% level beyond which it would be forced to make a bid for a whole trust. This means it can hope to rely on investor inertia to force through a change, which has exposed an uncomfortable loophole in the rules.
AIC chief executive Richard Stone has urged the FCA to look at the issue of independent directors, arguing: “The FCA needs to urgently explain its views on the independence of directors under the Saba proposals. If Saba wins the vote and is proposed as manager, how will potential conflicts of interest be managed?”
He added: “The FCA must review the scope of board independence in the Listing Rules. Saba’s campaign raises questions about the independence rules if they permit a significant shareholder, who may have a conflict of interest, to effectively select board members – particularly when those board members may go on to appoint that shareholder as the asset manager.” These are long-term questions for the regulator and the investment trust industry.
Will this episode change the investment trust market for the better? Certainly, it has exposed weaknesses in this sleepy sector, which has been left vulnerable by recent concerns about cost disclosure. Hawksmoor’s Fullerton said: “We do care about the health of the wider investment trust sector, which has not been good over the last few years for a number of reasons, but I do not see these Saba votes as a fight, or a cause, in themselves. We are not picking a side – we are looking for the best outcome. If Saba came back with something we thought was in our clients’ interests, we would vote with them.”
Stifel investment companies research chief Iain Scouller saw what happens after the votes as “the more important issue” for the sector. Even though Saba has lost its battle against Herald, it still holds a significant number of shares and would seem unlikely to go quietly. Presumably, the group will not just dump the shares on the market because the discounts would likely soar. Only this morning, the story saw a new twist as reports of a short-seller taking positions in a number of the trusts emerged. It may need a concerted effort by the investment trust sector to ensure the remaining shareholders are not disadvantaged.
Read more on this from the FT here and from the AIC here
In focus: ‘Trump 2.0’
There is a new guy in the White House and ‘Trump 2.0’ promises to be altogether more organised and disciplined than the first version. The wild promises of his campaign are now coalescing into a more coherent policy agenda although, on the one area where investors need most clarity – tariffs – information remains elusive.
There were hints in Trump’s Davos speech that the tariff regime may not be an onerous as some of his bolder rhetoric had suggested. Equally, there are practical considerations. Will he really impose 25% tariffs on Canadian oil, with all the potential associated inflationary impact for the US consumer?
Libby Cantrill, PIMCO head of public policy, said: “President Trump talked about tariffs in his speech as well as issuing an ‘America First Trade Policy’ Executive Order, which among other things, directed his cabinet secretaries to ‘investigate the causes of our country’s large and persistent annual trade deficits in goods’ and ‘recommend appropriate measures, such as a global supplemental tariff or other policies, to remedy such deficits’.”
She added: “Tariffs may not have been increased on Monday, but we would urge folks not to read too much into what is more likely a delay, rather than an absence of future tariff actions. At the same time, we think blanketed tariffs on Mexico and Canada – particularly at the 25% level – are less likely than country-specific tariffs in other places. We continue to think the EU and China are quite vulnerable.”
For his part, James Calder, chief investment officer at City Asset Management, saw “identifying the relative winners” of a Trump presidency as the difficult part. “The US is taking up significant bandwidth in terms of our assessment,” he continued. “A bombastic US president with an ‘America First’ policy is leading to in-depth discussions regarding our US exposure, particularly those areas that will benefit from a domestic tailwind, such as small and midcap equities. It is important to take a breather and contemplate what this means.
“Small and midcap investing, to the UK-based investor, implies additional risk. Setting the scene, one tends to overlook just how large the US market is, when we talk about small and midcap. In the US, the average smallcap company market capitalisation is counted in the billions of US dollars whereas in the UK – and keeping to the same currency – a smallcap market capitalisation average is in the very low hundreds of millions. Therefore, our US weight will be undergoing further assessment.”
Read more on this from Jupiter Merlin here and from Morningstar here
