In our recent webinar, Why UK & Global Equities Now? Market Insights Strategist, Ben Gutteridge, hosted a discussion with Joe Dowling, Global Equities Fund Manager; Martin Walker, Co-Head of UK and European Equities; and Georg Elsaesser, Senior Portfolio Manager within the Invesco Quantitative Strategies (IQS) team.
The conversation explored how active and enhanced index strategies can unlock opportunities in today’s evolving market, why UK and global equities remain compelling, and what macroeconomic trends are shaping the investment landscape. Our panel shared insights about how active management can deliver value amid uncertainty.
Here are the key takeaways.
1. Market outlook and opportunities
- Equity markets are currently reasonably well set up, with growth slowing but remaining resilient.
- Central banks like the US Federal Reserve and Bank of England are expected to cut interest rates cautiously, potentially supporting a "Goldilocks" scenario of steady growth.
- UK equities benefit from international revenue exposure (only about 26% of UK market revenues come from the UK), which cushions the market from domestic economic uncertainties.
- Sectors such as housebuilding, construction, real estate, and consumption could benefit if interest rates decline.
- The banking sector's future returns are expected mainly from dividends and share buybacks, supported by healthy returns on capital.
2. Enhanced index strategies
- Enhanced index funds aim to deliver moderate outperformance while maintaining an index-like risk profile by taking small active positions.
- These strategies use factor investing, focusing on broad exposure to factors such as value, momentum, and quality rather than concentrated stock picking.
- Portfolios are highly diversified to reduce single-stock risk.
- Factor premiums (value, momentum, quality) are structural and persistent over the long term, providing a consistent source of alpha when harvested systematically.
- Enhanced strategies do not attempt to time factors or sectors but maintain a disciplined, consistent approach.
- These strategies have shown strong inflows, indicating investor demand for a middle ground between passive and fully active management.
3. Fund differentiation and complementarity
- Enhanced index funds differ from fundamental active funds in their risk drivers: enhanced funds rely on factor risk, while fundamental funds rely more on single-stock risk.
- Combining enhanced factor strategies with fundamental active strategies can improve diversification and information ratios, potentially benefiting overall portfolio performance.
- Fundamental managers emphasise a flexible interpretation of value, considering various valuation metrics and the unique characteristics of companies.
- Both approaches require disciplined processes, continuous improvement, and the integration of new tools (e.g., AI, risk analytics) to maintain competitive advantage.
- Emotional detachment is a hallmark of enhanced index management, relying on systematic models and strict risk controls to avoid over-concentration or emotional biases.
4. Investment themes shaping the markets
- Joe Dowling, cited Broadcom and Taiwan Semiconductor Manufacturing Co. as quality companies with pricing power and robust growth outlooks.
- Martin Walker said that infrastructure companies like National Grid are seen as defensive, economically insensitive assets with steady growth and earnings potential, aligned with long-term trends like electrification and net zero.
- Georg Elsaesser revealed that income-focused funds seek a balance of income and capital growth to avoid value traps, with certain stocks exemplifying this "sweet spot" of healthy yield and growth.
5. Performance drivers and confidence
- Consistent application of a clear, well-executed investment process is key when aiming to deliver long-term outperformance.
- Structural factor premiums and disciplined portfolio construction underpin the enhanced index strategies’ success.
- Fundamental managers focus on finding good businesses run by trustworthy management, buying at attractive prices, and maintaining diversified portfolios.
Continuous monitoring and willingness to adapt or exit positions when investment theses change are critical to sustained performance.
