Markets have been on a strong run, with the MSCI World index up over 7% in the past three months alone*. Yet, while this should be welcome news, the recent surge has left some investors questioning whether the rally can keep up its momentum.
Data shows that sentiment is mixed. Calastone reported continued equity fund outflows in August, with global equity funds seeing withdrawals of £658m – marking an unprecedented third consecutive month of selling in this sector**. At the same time, multi-asset funds were the only area to notch three straight months of inflows, highlighting that investors aren’t abandoning markets altogether but are instead looking for balance and diversification.
This sense of rebalancing is echoed in the UK market. According to the Investment Association, July saw inflows of £303m into Europe ex-UK funds and £285m into the Mixed Investment 40–85% sector***. Rather than signalling an exit from equities, this suggests investors are rotating into different regions and strategies, seeking resilience while staying invested.
Why rebalancing matters
Periods of strong performance can leave portfolios skewed towards certain regions, sectors or asset classes. Rebalancing – trimming areas that have grown quickly and reinvesting into those that look undervalued – can help maintain the right mix of risk and reward.
For example, global funds tilted heavily towards the US technology giants may benefit from a shift towards overlooked areas such as Europe, value funds, or smaller companies. Multi-asset solutions, such as the VT Chelsea Managed Fund Range, also offer a way for investors to stay invested while matching their portfolio to their preferred level of risk. For those who are wary of near-term volatility, the VT Chelsea Managed Cautious Growth fund provides measured exposure to growth opportunities.
Small-cap shows signs of revival
In this environment, investors have a number of options. They can stick with stock markets, but search for those parts of the market that have been overlooked. Smaller companies are a good example. These have lagged their large-cap equivalents since the pandemic, and have tentatively started to revive as interest rates have fallen.
Some fund managers believe that smaller companies are now trading at historic discounts despite their strong fundamentals. This could mark the start of a broader revival, offering investors a chance to tap into dynamic, often overlooked businesses with significant growth potential.
Sean Peche, manager of the Ranmore Global Equity fund, can invest across the market spectrum, but is finding particular opportunities in small-caps today. He says: “Recent trends suggest a shift is taking place – in August, small-caps delivered double the return of large-caps (5.2% vs 2.6%) and are now ahead over six months (14.3% vs 10.6%). This outperformance is not unusual…Smaller companies often outperform large companies because they’re more nimble and able to capitalise on emerging opportunities and market changes.
“The “law of large numbers” also suggests it’s easier growing off a smaller base than a large one, although the incredible earnings growth from the Mag 7 in recent years has damaged this thesis somewhat. Maybe it will be true from this point because what’s noteworthy is that this recent outperformance by small-caps has occurred despite strong June quarter results and earnings upgrades for most of the Mag 7.”
This small-cap revival has been seen across multiple markets. Investors can capitalise through a multi-cap fund like the Ranmore one, or a specialist option such as Artemis US Smaller Companies, or WS Amati UK Listed Smaller Companies. For investors considering a European revival, one example is the IFSL Marlborough European Special Situations fund, which combines a European focus with a small-cap tilt.
Value funds and bonds offer an alternative
Another alternative would be to pick a ‘value’ focused fund. These funds have an inbuilt value discipline and therefore should naturally avoid the highly-priced parts of the market. Schroder Recovery, for example, has built a strong long-term track record investing in those parts of the market that no-one else likes. Its portfolio currently includes Burberry, BT and Prudential****. For a global option, the Guinness Global Equity Income fund could be a solid choice.
If all stock market options feel unpalatable, a bond fund would usually be a natural second choice. However, valuations in parts of the bond market also look problematic – corporate bond spreads (the reward investors receive for investing in higher-risk corporate bonds over government bonds) are at their lowest level in 25 years^. That said, government bond yields are still high, which gives investors a strong margin of safety. A good strategic bond fund, such as the Invesco Tactical Bond fund, should be able to navigate bond markets and deliver a stable return.
You don’t need to hide in cash because parts of the market look expensive. The US stock market has been on a roll, and some pull-back was inevitable. Valuations elsewhere around the world look reasonable, so there are plenty of options for worried investors to pick.
