Enjoy today’s valuations in the Tideway App, at all-time highs for the most part. They will be heading lower tomorrow.
A combination of ‘Risk Off’ in US equities as investors fret over the AI bubble, the US Government shut down and the next move in interest rates, plus machinations in the UK’s Labour party sending UK gilt yields higher again will mean the inexorable rise in our portfolios is going to be paused.
But let’s not panic. Our flagship Balanced Multi Asset portfolio is +11.5% YTD, we have been rewarded handsomely for taking investment risks in 2025 and can afford to hand back some returns and still have a very nice year. The impact of the reversal in gilt yields so far, will be at most just a couple of weeks’ worth of the interest being earned on our fixed income investments. As we have been writing of late, our selection of equity funds has been created exactly for this kind of action. It won’t be immune, but we think it should hold up reasonably well compared to the main indices.
How We Mitigate Market Downturn Risks
Whilst we have falling share prices, we have a great live opportunity to look at the steps we take with your money to mitigate the worst impact of share price corrections.
In a nod to our fantastic compliance officer James Saddington, I will use his set agenda for Tideway’s Risk Committee, which James chairs. It sits every six months when we are relaxed and quarterly if there is stuff to worry about. In this committee we endeavour to list every risk that might impact the business, we then grade the worst-case impact of each specific risk and look at the steps taken to mitigate the risks and whether we can improve them. Finally, we grade the impact of each specific risk after the mitigating actions have been taken.
We can follow the same agenda for losses on our portfolios in market down turns.
To keep the table to a modest size (our Risk Committee table is huge and not for the faint hearted!) I will list first the four main risks and mitigating actions and then discuss the impact of these actions after the table.
Looking in more detail at each risk and mitigating action:
Risk 1 and Using Collective Funds
Investing collectively in diversified funds is the first line of defence against market down turns. This week’s sell off is highlighting this risk in spades.
A good chunk of the companies listed on the Nasdaq make no money or are heavily valued based on unknown future earnings potential. These companies are being hit the hardest and some may never fully recover again. Crypto to AI infrastructure business CoreWeave and bitcoin hoarder Strategy are both down more than 50% from highs in 2025 and Trump Media & Technology is down 75% from its January 2025 high.
These are all relatively small companies by modern standards, but the mega caps are also feeling the pain. The mighty Nvidia is almost 15% off its high this year, Meta is 25% below its all time high and Tesla 20% down on its 2025 high. These corrections will hurt the indices. If anyone wants to see AI speculation in full view, look no further than Elon’s speech at the Tesla shareholders meeting in November, the full transcript is online.
In fixed income, individual companies can also do damage as well. The recent headlines have been around private credit, but there are issues in the listed high yield space as well. Ineos issued high yield bonds, and they are reported in the FT today trading at 80p in the £1 as Sir Jim Ratcliffe’s empire comes under pressure.
The collective equity funds we invest in will typically hold at least 25 companies shares and in our fixed income funds at least 50 different bonds. This diversifies the risk of a single company failing or its shares or bonds falling heavily.
In terms of the impact of this risk mitigation action, 75% losses in individual securities are not uncommon, they are very rare in collective funds.
Risk 2 and Investing Actively
Anyone who follows investment markets will be aware that equity indices have become very concentrated of late with the big rise in value of the US mega cap tech stocks. The individual stock concentration is very high with the top 10 companies in the S&P 500 making up over 40% of the index.
But also, the sector concentration in tech in global indices is massive with the likes of Taiwan Semiconductors dominating Asian markets and technology representing over 25% of the MSCI World index makes index investing very vulnerable to a bubble in AI.
Whilst it may be possible to get away from these concentrations by using sector based ETFs the way Tideway choses to do it is by investing with active managers who individually and collectively allow us to invest in a more diversified way.
The impact of this action is harder for us to quantify. On the upside we have seen our active value and income managers performing well. At the end of September, the 5 years return from our active Equity Income portfolio was 90%, versus Vanguards 78.5% from its Global All Cap fund.
As to the extent to which this diversification will help us on the downside, we may well be about to find out.
Risk 3 and Asset Diversification
Until the end of 2022 investing in fixed income was generally seen as a bit of a drag on performance but an action to take to try and smooth portfolio returns. In the first 20 years of the 21st century and in the latter stages of the 20th century when stock markets fell, Government bonds usually went up, therefore lowering the overall impact of the fall in equities. In the run up to 2022 the return on Government bonds was so low that many firms like Tideway found them un-investable and in 2022 they fell just as much as equities as interest rates rose.
This left many questioning the wisdom of the traditional 60/40 portfolio, 60% in equities 40% in bonds which had become a very popular investment strategy. But in 2025 we can see strong returns from our fixed income funds with a much higher degree of certainty than on our equity funds and diversification into fixed income does not necessarily mean a big give up in returns. Nor are we expecting a repeat of 2022, we are expecting more stable returns from fixed income.
We also invest in infrastructure, which we do via a fund investing in listed infrastructure equities, so there will be correlation with the main indices, but these companies typically have physical assets backing their balance sheets and incomes linked to inflation underpinning their profits and should be reliable in a downturn. Finally, we have Ruffer, now one of our top holdings in terms of size and which uses a variety of instruments to make money in down turns, their track record on this is very good:
- 2000-2002 Dotcom bust: +26.9% versus -25.8% for FTSE/ MSCI WMA
- 2008 Global Financial Crisis: +16% versus -17.4%
- 2020 Covid: +16.7% versus 1.9%
- 2022 rate rises: +5.7% versus -8.1%
Whilst the April correction this year was short lived it was a dress rehearsal for a bigger sustained downturn. In that month our Balanced Multi Asset portfolio fell just over 3% from the end of February to the end of April. By contrast the FTSE world index fell around 9% for the same period with a peak to trough fall of over 14%.
This gives us a good feel for the impact of diversification in our portfolios.
Risk 4 and Segregation of Investments
We have certainly covered this in the past, but it’s worth taking a moment to remind ourselves of this relatively simple action. In most cases markets will recover and within a reasonable time frame, typically within 5 to 10 years at worst, often much more quickly.
Segregating a pool of liquidity in either cash or one of our lower risk bond portfolios means that if you need money, you can cash capital at a profit and not at a loss. This is known as sequencing risk and we have written about it here on our website and it can have a big impact when executing pension drawdown and particularly when you want to draw more than the natural income yield on your portfolio.
Managing risks 1 and 2 are a job for the Tideway investment team, risks 3 and 4 need to be done with you on a bespoke basis and should be something you discuss with your wealth manager.
Finally, a quick welcome from me to Ben Gilfillan who joined our wealth management team this week taking it to a team of seven. We don’t think Ben is going to need much luck, like the rest of the team he believes in hard work and solid advice!
