Argentina’s VALO Absorbs Columbus and Strengthens its Financial Services Offering

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A recent CNV resolution authorized the merger of two players in the Argentine financial world: VALO, a firm specialized in investment fund custody and financial trusts, absorbs Columbus, a company with extensive experience in investment banking and capital markets.

“VALO has 24% of the investment fund custody business, is the leading trustee in the sector, and as a result of the merger, it is also a leader in the investment banking segment, both in mergers and acquisitions operations and in valuations and restructurings,” they announced in a statement.

Additionally, the firm is positioning itself in corporate banking with a service line designed to provide comprehensive support to companies seeking to enhance their growth.

“This strategic union not only expands the reach of our services but also strengthens and consolidates VALO as a key player in a constantly evolving financial system. We are going to take on a leading role in what’s to come in the market: in structuring debt issuances for both the private and public sectors, as well as in equity and stock placements. We have the people, the experience, and the clients to fill that role,” said Juan Nápoli, president of VALO.

The entities, which are already operating as a united and integrated company, offer comprehensive financial services for corporate and institutional clients. Current clients of both entities will now have access to a broader and more specialized portfolio of services, while new interested parties will find a fresh value proposition.

“The synergy we have achieved is revolutionary for the sector. With this merger, VALO becomes the most professional 100% corporate bank with the most comprehensive product offering in the Argentine market. Together, we can innovate faster, provide excellent service, and offer the most suitable business solutions for our clients. This merger not only strengthens our market position but also allows us to offer more efficient services with a highly specialized team in complex transactions,” explained Norberto Mathys, vice president and CEO of VALO, and Koni Strazzolini, former Columbus partner and newly appointed board member of VALO.

VALO (Banco de Valores S.A.) was founded in 1978 by the Mercado de Valores (MERVAL) and operates as a financial trustee and custodian of mutual funds. Following the merger by absorption of Columbus, it is now the only wholesale bank in the country offering a comprehensive proposal for corporate and institutional clients. Additionally, since 2020, VALO has been pursuing a solid growth strategy at the regional and global levels and currently has a presence in Uruguay, the United States, and Paraguay.

One in Five Pension Funds Lacks Liquidity in Adverse Scenarios

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Over the past decade, pension funds have increased their investments in private assets to enhance returns through the illiquidity premium. However, they are now reconsidering the potential liquidity risks associated with this strategy. According to a new global survey conducted by Ortec Finance, a specialist provider of risk and return management solutions for pension funds, nearly 18% of pension funds report not having enough liquidity to withstand adverse scenarios.

The study, conducted in the United Kingdom, the United States, the Netherlands, Canada, and the Nordic countries, surveyed senior executives from pension funds managing a total of $1.451 trillion in assets. It found that, in addition to the 18% reporting insufficient liquidity, another 62% believe they have enough liquidity for most scenarios but acknowledge that extreme situations could pose challenges. In contrast, only 20% say they have no liquidity concerns.

Fund managers identify both short- and long-term risks, with long-term liquidity risk being the primary concern among respondents. About 60% cite this as the main risk facing the funds they manage, while 25% consider short-term liquidity risk to be the most significant. Only 15% believe that short- and long-term risks are roughly equal.

The increase in exposure to private assets is part of the reason behind liquidity concerns, particularly among defined benefit (DB) pension schemes. Among the managers surveyed, 80% reported that unfunded commitment risk represents either a significant or moderate threat to the DB pension industry over the next three years. Overall, 25% of managers believe that unfunded commitments beyond the control of pension portfolio managers pose a significant risk, while 19% do not consider it a risk.

Despite these liquidity concerns, 58% of respondents state that liquidity is already well managed, and 28% believe other risks are more pressing. Meanwhile, 10% consider liquidity risk a priority, while 4% say it is not a major concern.

“Our study highlights the liquidity challenges facing pension funds, particularly given the unpredictability of projecting unfunded commitments and capital calls. To address this issue comprehens

Pension Funds Increase Private Asset Exposure but Face Growing Liquidity Concerns

Over the past decade, pension funds have increased their investments in private assets to enhance returns through the illiquidity premium. However, they are now reconsidering the potential liquidity risks associated with this strategy. According to a new global survey conducted by Ortec Finance, a specialist provider of risk and return management solutions for pension funds, nearly 18% of pension funds report not having enough liquidity to withstand adverse scenarios.

The study, conducted in the United Kingdom, the United States, the Netherlands, Canada, and the Nordic countries, surveyed senior executives from pension funds managing a total of $1.451 trillion in assets. It found that, in addition to the 18% reporting insufficient liquidity, another 62% believe they have enough liquidity for most scenarios but acknowledge that extreme situations could pose challenges. In contrast, only 20% say they have no liquidity concerns.

Fund managers identify both short- and long-term risks, with long-term liquidity risk being the primary concern among respondents. About 60% cite this as the main risk facing the funds they manage, while 25% consider short-term liquidity risk to be the most significant. Only 15% believe that short- and long-term risks are roughly equal.

The increase in exposure to private assets is part of the reason behind liquidity concerns, particularly among defined benefit (DB) pension schemes. Among the managers surveyed, 80% reported that unfunded commitment risk represents either a significant or moderate threat to the DB pension industry over the next three years. Overall, 25% of managers believe that unfunded commitments beyond the control of pension portfolio managers pose a significant risk, while 19% do not consider it a risk.

Despite these liquidity concerns, 58% of respondents state that liquidity is already well managed, and 28% believe other risks are more pressing. Meanwhile, 10% consider liquidity risk a priority, while 4% say it is not a major concern.

“Our study highlights the liquidity challenges facing pension funds, particularly given the unpredictability of projecting unfunded commitments and capital calls. To address this issue comprehensively, funds should focus on scenario modeling and stress testing. Modeling capital calls and private asset distributions can help funds understand their potential liquidity constraints in worst-case scenarios over the next five, ten, or twenty years,” says Marnix Engels, Managing Director of Global Pension Risk at Ortec Finance.

Thornburg Launches Its First Active ETFs

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Thornburg Investment Management, a global investment firm, has announced the launch of its first two exchange-traded funds (ETFs): Thornburg International Equity ETF (Nasdaq: TXUE) and Thornburg International Growth ETF (Nasdaq: TXUG).

“We are very excited to enter the ETF market and provide clients with an additional way to access our investment solutions,” said Mark Zinkula, CEO of Thornburg. “Each of these new ETFs reflects our long-term commitment to meeting client demand for solutions with an active, fundamental investment process and a high-conviction approach.”

Thornburg International Equity ETF is managed by Lei Wang, CFA, and Matt Burdett, while Thornburg International Growth ETF is overseen by Sean Sun, CFA, and Nicholas Anderson, CFA. Thornburg International Equity ETF seeks long-term capital appreciation, whereas Thornburg International Growth ETF focuses on long-term capital growth. Both funds primarily invest in equities from non-U.S. developed markets.

For over 42 years, Thornburg has been a recognized leader in equity, fixed income, and multi-asset investing. In the coming months, the firm plans to launch two fixed-income ETFs: Thornburg Core Plus Bond ETF (Nasdaq: TPLS) and Thornburg Multi-Sector Bond ETF (Nasdaq: TMB).

“Thornburg’s ETF strategies offer investors flexible, transparent, and efficient opportunities to build and diversify their portfolios,” said Jesse Brownell, Global Head of Distribution. “Building Thornburg’s ETF platform represents significant human and capital investments to ensure that our infrastructure is scalable and successful for our clients,” he concluded.

Thornburg Investment Management manages $45 billion in assets, including $44 billion in managed assets and $1 billion in advised assets as of December 31, 2024.

U.S. RIAs Reached Record-High Mergers and Acquisitions in 2024

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The U.S. Registered Investment Advisor (RIA) industry reached a record 272 mergers and acquisitions (M&A) transactions in 2024, according to DeVoe & Co.’s fourth-quarter report. The numbers were record-breaking for the year, quarter, and most active month in history, with higher levels of private equity participation.

“This historic level of activity provides significant momentum heading into 2025, after nearly three years of steady deal flow,” states the report by the San Francisco-based consulting firm. In its conclusions, the report projects that “merger and acquisition activity will steadily increase over the next five or more years, barring any unforeseen events.”

RIA M&A activity remained slightly above 2023 levels from January to September 2024, making it seem unlikely that the 2022 record would be surpassed. During 2022, industry merger and acquisition activity maintained a steady pace of around 60 transactions per quarter, which continued for 11 quarters. However, 2024 ended with a record-high quarterly mark of 81 transactions, pushing the year into record territory. October was a decisive month, with 39 transactions, nearly doubling the 21 transactions recorded the previous year and surpassing the previous monthly high.

“This momentum is likely to continue into the new year, and the industry may once again be on track for a steady increase in mergers and acquisitions in the future,” said David DeVoe, founder and CEO of DeVoe & Co.

Rate Cut Momentum

According to the report, on the buyer front, the increase in activity was primarily driven by interest rate cuts that began in September 2024. Lower capital costs, implications for debt ratios, and the expectation of more cuts in the future resulted in highly leveraged acquirers easing financial constraints.

On the seller side, post-election market gains boosted valuation expectations and delayed any willingness to explore potential sales.

The fourth-quarter increase in private equity-backed buyer activity was also evident in their participation in transactions. Private equity firms were directly or indirectly involved in a record 78% of all RIA transactions in the fourth quarter of 2024, a significant increase from 69% participation in the first three quarters of the year. Announced acquisitions by major players such as Beacon Pointe, Cerity Partners, and Waverly Advisors exemplify this increase.

Shift in Buyer Dynamics

According to the report, the fourth quarter saw a change in buyer dynamics. RIA buyers captured 36% of total transactions in 2024, up from 29% in 2023, while consolidator activity fell to 44% during the year, down 3 points. The “other buyers” category (private equity firms, broker-dealers, banks, and all other RIA buyers) slightly declined, representing 20% of all transactions, compared to 24% in 2023.

DeVoe & Co. Methodology

DeVoe & Co. focuses on transactions of $100 million or more in assets under management to optimize the statistical accuracy of its reports and excludes SEC-registered hedge funds, independent broker-dealers, mutual fund companies, and other firms that do not operate as traditional RIA firms.

Trade War: Data and Two Graphs to Understand What Could Happen

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Trade war and market data
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For investors, determining their asset allocation this year will be especially challenging. One of the main uncertainties is whether the new president of the United States, Donald Trump, will raise export tariffs and potentially spark a trade war.

Abhishek Gupta, Executive Director of MSCI Research, analyzes the situation with data from his firm and explains in a report that “nearly 40% of global corporate revenues are generated in international markets, and 18% may be at risk due to the tariffs proposed by the U.S. and potential counter-tariffs. Furthermore, the risk was evenly split between non-U.S. companies selling in the United States (8.4%) and U.S. companies selling internationally (9.7%).”

Tariff Risk by Country and Sector

Japan, Germany, the United Kingdom, China, and Canada are the top five countries (by revenue in U.S. dollars) that sell in the U.S. market. Among them, Japanese, German, and Korean automakers dominate automobile and component imports, while Chinese, U.K., and Canadian companies lead energy imports.

Capital goods and materials also make up a substantial portion of total U.S. imports, but these are more fragmented among exporting nations. Other industries, such as pharmaceuticals, food and beverages, and durable consumer goods, have accounted for a smaller share of total U.S. imports but could be at risk due to their dependence on U.S. demand.

Beyond revenue exposure, the location of a company’s production facilities can add another layer of risk. For example, several Japanese automakers produce vehicles in Mexico. Higher U.S. tariffs on Mexican imports could have a disproportionate impact on these companies compared to those that manufacture in Japan.

The following heat map analysis combines data from MSCI Economic Exposure and MSCI GeoSpatial Asset Intelligence to highlight the number of companies economically tied to the United States (defined as deriving more than 10% of their revenue from the U.S.) that have production facilities in Canada, Mexico, or China—all of which could be subject to higher tariffs.

Approximately 390 non-U.S. companies meet these criteria (of which 90 are Canadian, Mexican, or Chinese companies). Japanese companies appear to be the most exposed, with 91 at risk, including 28 in the capital goods industry and 18 in the automotive sector. Many European companies may also be at risk due to overlapping revenue dependencies and production locations.

Japanese and Chinese Companies Top the List of Those Most Exposed to Higher U.S. Tariffs

If U.S. trade partners facing higher tariffs choose to impose their own tariffs on goods imported from the U.S., American companies will suffer, as they collectively derive a quarter of their revenue from international markets. China, for example, was the largest end market for U.S. goods in November 2024, with an export value to the U.S. more than double that of the United Kingdom, the next largest importing market. U.S. exports in technology, semiconductors, energy, capital goods, and other industries are the most exposed to such potential retaliatory measures.

However, in practice, corporate supply chains can be extremely complex, and intermediate inputs may cross national and regional borders multiple times before reaching final production. The tariff impacts on companies are more complicated than they might appear.

Blue Owl Soars Across Latin America, Captivating Institutional Investors with Its Sixth GP Stakes Fund

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(cedida) Michael Rees, co-presidente de Blue Owl (izq), y Philippe Stiernon, CEO y Managing Partner de Roam Capital (der)
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After five iterations, specialized asset manager Blue Owl is in the process of raising capital for its sixth GP Stakes fund. This strategy aims to cover the spectrum of alternative assets by investing in a variety of prominent specialized fund managers. As part of its commercial push, the firm is focusing intently on Latin America, targeting institutional investors in the region.

“This is a very unique way to invest in private markets,” says Michael Rees, Co-President of Blue Owl, in an interview with Funds Society. From the institutional investor’s perspective, Rees highlights three key pillars of the strategy’s appeal: an “extremely” diversified portfolio, capital efficiency, and cash flows.

Sources familiar with the process reveal that GP Stakes VI is targeting $13 billion in capital. The fundraising process is approximately halfway through, with expectations that the fund will close during 2025.

Rees confirms that the strategy will begin deploying capital in early 2025. “We’ve already raised significant capital, so we can start deploying it as soon as possible,” he explains.

Latin America Roadshow

The firm’s commercial effort in Latin America has included multiple visits to the region in recent months. “We have a strong focus on Mexico, but also on Chile and Colombia,” says Philippe Stiernon, CEO and Managing Partner of Roam Capital, the firm distributing Blue Owl’s products in the region.

In 2024, Blue Owl made two trips to Mexico—in March and November—to participate in the Encuentro Amafore, one of the key events for the pension fund industry (Afores). Additionally, the firm visited Chile and Colombia during the second week of January.

“We’re very excited about this,” says Rees. “Throughout 2025, we’ll conduct more roadshows and ensure we’re accessible to our clients,” he adds.

According to Rees, there are two types of investors who will find the fund particularly attractive. On the one hand, there are clients with well-established private markets portfolios seeking a product that generates alpha and outperforms the industry. On the other hand, there are investors just beginning to explore private assets who are looking for broad exposure through a single structure.

Stiernon explains that the institutional markets in Chile and Colombia align more with the first type of investor, while Mexico falls closer to the second. Although the Afores are not new to alternative investments, their growth has been more recent. “Many Afores are gaining momentum, with positioning limits increasing. That opens up opportunities for some institutions there to make significant moves into private markets,” Rees adds.

Even in jurisdictions with pension reform challenges—such as Colombia, Peru, and potentially Chile—the executives see room for interest. “Even in countries facing regulatory challenges, this product works seamlessly. It’s truly an all-weather product,” says Stiernon.

The GP Stakes Formula

The sixth fund in the series, like its predecessors, will span all major categories of alternative assets. Its portfolio is expected to follow the same pattern as earlier versions, reflecting the broader industry.

Rees anticipates the fund will invest approximately 60% in buyout managers, with the remaining 40% split across growth capital, venture capital, infrastructure, private credit, and real estate.

This diversification is at the core of GP Stakes VI’s pitch. Rees emphasizes that the fund isn’t just diversified by the underlying assets of the managers it invests in or by GP but also by geography and vintage year.

“When we invest in a GP, our clients gain exposure to their older funds, which are still active, and also to the funds they’re likely to launch in three, five, or ten years,” Rees explains.

Another critical component is the fund’s cash flow. GP Stakes, Rees notes, is a “yield strategy” that generates returns without needing to sell its stakes in alternative managers since it invests in profitable firms. “As we invest, we’re generating cash flow and yield almost immediately. So, while you’re putting money to work, you’re also taking money out,” he says.

The Profile of GPs

As for the type of asset managers Blue Owl targets, Rees stresses that the strategy seeks industry leaders with decades-long operational horizons. “We’re looking for private market firms that are building valuable franchises we can hold a stake in for a very long time,” he explains.

While the selection of GPs serves the fund’s diversification goals, Rees says the analysis process is entirely bottom-up. The priority is determining whether the manager ranks among the best in its category. “When you think about the top 100 or 200 GPs in the industry, that’s our fishing pool,” he notes, adding that “there are real benefits to being big in today’s market.”

Size, according to Rees, filters access to the client segments driving growth. “The new capital isn’t coming from U.S. state pension funds like it did a decade ago. It’s coming from the wealth channel and geographies that are increasing their positioning,” he says, citing Mexico, Australia, the Middle East, and Asia.

“If you’re a small firm and rank 5,000th in the industry, you won’t have access to those types of clients. That’s why we’re seeing this growth phase favor the larger, branded firms,” he concludes.

Edouard Carmignac: “Donald Trump Can Be Criticized, but We Must Acknowledge That He Has a Formidable Instinct”

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Edouard Carmignac and Trump’s economic instinct
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Edouard Carmignac had the opportunity to have lunch with the now-president Donald Trump 20 years ago. It was a business lunch where the founder, president, and CIO of Carmignac Gestion gained a good understanding of the character of the then-businessman, which has helped him assess how his second, non-consecutive term as U.S. president might unfold: “Donald Trump, for his flaws, can be criticized, but we must acknowledge that he has a formidable instinct. In a world seeking growth but that is globalized and where traditional models no longer work, his approach has an impact.” Although the president and CIO admitted that some of Trump‘s promises “include extreme proposals that may sometimes seem radical,” he also stated that “boldness and leadership are needed because the old paradigms are no longer sustainable.”

These remarks were made by Carmignac at the annual forum organized by his firm in Paris for clients and the media, which this year also marked the 35th anniversary of the firm and its flagship fund, Carmignac Patrimoine.

One of the major investment-related topics Edouard Carmignac addressed in his speech was the shift in the global political order, where he was particularly critical of countries with left-wing governments: “The classic redistribution models, which worked well in the past, are now exhausted. Resources cannot continue to be redistributed if there is no way to generate them. That is why European models face resistance and need to reinvent themselves with efficient governance.” However, despite these challenges, Carmignac maintained an optimistic outlook, asserting that “there is potential” for greater growth in Europe, and expressed confidence that European governments would gradually shift towards more conservative and right-wing positions, beginning with Germany after the elections scheduled for February.

Carmignac cited another example of a global leader, Javier Milei, with whom he had a one-hour meeting. Among the topics they discussed were economics and their shared views on the Austrian School of Economics. “I was impressed by his intelligence and his knowledge of economics. He has an unwavering determination to change Argentina and move it forward, which will have an impact not only on his country but also on South America,” Carmignac emphasized.

Among the investment themes for 2025 that Carmignac Gestion is monitoring, Edouard Carmignac highlighted that “a technological revolution is underway,” though he preferred to call it “augmented intelligence” rather than artificial intelligence. “We are witnessing a transformation that is just beginning, and those who invest in it will find great opportunities.” Regarding cryptocurrencies, he took a more cautious stance, instead emphasizing the importance of “continuing to invest in projects with real value and long-term sustainability.”

Outlook for 2025

Raphaël Gallardo, chief economist at Carmignac Gestion, provided a more detailed and specific analysis of key themes the firm is monitoring this year, positioning their funds accordingly. He began by discussing the current situation in the U.S., particularly the difficult paradox facing the new Trump administration, which has promised continued economic growth while avoiding inflationary pressures.

Specifically, Gallardo identified three factors affecting U.S. growth: the high deficit (above 6%), which will constrain budget decisions; the sustainability of the wealth effect experienced by households in recent years, driven by rising financial asset prices, which Gallardo questioned; and, related to the previous two, the evolution of interest rates, which he believes “will determine the budgetary margin,” as each movement in the cost of money directly impacts stock market valuations and real estate assets while also absorbing up to 20% of U.S. household incomes.

According to the chief economist, Trump has four key levers to navigate this challenge: reducing public spending through the newly created Department of Government Efficiency (DOGE), led by Elon Musk; promoting deregulation, particularly in artificial intelligence; implementing tariffs; and lowering oil prices by flooding the market with more barrels, which would require negotiations with Saudi Arabia and even Russian authorities, potentially leading to a resolution of the war in Ukraine.

On the other side of the world, Gallardo discussed China’s “obsession with trade surpluses,” arguing that its export figures are inflated due to the country ramping up shipments in 2024 ahead of new U.S. tariffs. Gallardo believes Xi Jinping‘s government is currently at an “impasse,” as it attempts to mitigate the negative impact of the real estate sector on the economy while trying to “set a consumption floor without altering the economic model.”

Regarding a potential new trade war between the U.S. and China, Gallardo sees multiple factors at play. He anticipates another shift in trade rules between the two nations—though he notes that Trump, unlike in 2018, is not being as aggressive with tariffs this time. He also cites other influences, such as the war in Ukraine and the ongoing fentanyl trade between the two countries.

Finally, Gallardo argues that the EU can play a key role in this historic rivalry in three ways: first, by becoming a better client for the U.S., particularly by increasing demand for American goods and services in the defense and gas sectors; second, by coordinating with the U.S. to decouple China’s technological advancement, creating a competitive advantage; and third, by leveraging deregulation within Europe to impact U.S. companies, such as enforcing stricter regulations on digital giants.

UCITS Equity Funds vs. Their ETF Version: How to Properly Compare Returns?

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UCITS funds and ETF performance
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The growth of the ETF segment in the European fund market has raised a new question: Is a simple average sufficient to compare the sectoral performance of active versus passive UCITS equity funds? This is the question that the European Fund and Asset Management Association (EFAMA) has sought to answer in its latest edition of Market Insights, titled “The Sectoral Performance of Active and Passive UCITS: Is a Simple Measure Enough?”

Although past performance does not guarantee future returns, recent literature has shown that funds with better historical performance attract more capital inflows. In recent years, passive funds have gained popularity due to their lower costs and their tendency to report higher average net returns than active funds. “However, the debate over which group of funds delivers better performance is more complex than it seems,” EFAMA acknowledges.

According to EFAMA, fund performance is typically reported by showing a simple or weighted average of the gross or net returns of all funds within a given category. “This is generally measured within a broad fund category, such as all active or passive funds, or the total universe of funds. This approach does not take into account the diversity of funds in terms of issuers, types of securities, geographical exposure, currency, and industry sectors, and consequently, the diversity in fund performance,” EFAMA explains.

To address this, EFAMA analysts have compared the net performance of different categories of UCITS equity funds over the past ten years (2014–2023). The analysis shows that in 2023, the average net return of active UCITS equity funds was 13.1%, while that of passive UCITS equity funds reached 16.7%, “suggesting that passive UCITS outperformed,” EFAMA states in its report.

When analyzing the distribution of average annual net returns of active and passive UCITS equity funds in 2023, it is observed that two years ago, in 2023, many active funds achieved returns as strong as passive funds, while many passive funds had lower returns than active ones. According to EFAMA, “the observed returns depend on various fund characteristics, such as the industry sector or geographical exposure, regardless of whether a fund is active or passive.”

Key Findings

“Our analysis reveals significant differences in the average net performance of sectoral equity funds, with neither active nor passive funds consistently outperforming the other,” says Vera Jotanovic, Senior Economist at EFAMA.

Meanwhile, Bernard Delbecque, Senior Director at EFAMA, explains that given the high diversity among investment funds, “retail investors should seek professional advice before allocating their savings to specific equity funds, ensuring that their choices align with their individual investment goals and preferences.”

In this regard, one of the main conclusions reached is that “significant differences in net performance are observed among UCITS equity funds across various industry sectors, for both active and passive funds.”

Additionally, it is concluded that while passive equity funds generally outperform active equity funds when comparing net returns across the entire universe of equity funds, this pattern does not consistently hold across all sectors.

It is also extrapolated that some active funds outperform passive funds, and vice versa, depending on the industry sector, the year, and the time horizon, “demonstrating that no category consistently delivers superior performance,” EFAMA notes. Finally, the report warns that its findings remain robust even after accounting for return volatility.

U.S. Investors Expect Returns of 6.4% for This Year

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U.S. investors and expected returns
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According to Vanguard’s Investor Pulse survey, American investors continue to maintain a predominantly positive outlook for the new year, following a clearly optimistic 2024. In fact, they expect a market return of 6.4% in 2025 and 7.6% over 10 years, and they also indicate that the U.S. GDP will grow by 4%. These positive forecasts coexist with a certain sense of economic uncertainty, which translates into inflation expectations of 3.2% and a more moderate short-term GDP growth.

In the history of this survey, Vanguard notes that 2024 was the most optimistic year for investors. Throughout last year, investors’ return expectations for the next 12 months remained above 6%, reflecting a high and sustained level of optimism. Looking ahead to 2025, the survey shows that investors continue with this level of optimism and currently expect the market to deliver a 6.4% return. For the next 10 years, investors expect the average annual market return to be 7%.

“Investor optimism reached a new level of stability in 2024 and remained there throughout the year. However, it seems that investors have adjusted their short-term economic outlook in the last few months of 2024. This could reflect people’s concerns about growth resulting from the increasing complexity of the current economic environment,” notes Xiao Xu, an analyst at Vanguard Investment Strategy Group.

U.S. Economy

A striking conclusion is that investors’ expectations for average GDP growth in the U.S. over the next three years softened throughout 2024, despite the strong economic growth recorded during the year. According to the survey, although growth expectations remain in a fairly optimistic range, the rebound from the June 2022 low may have come to an end. Specifically, the GDP growth forecast for the next 10 years remains high at 4%.

Lastly, inflation expectations throughout 2024 hovered around 3%, a level above the Fed’s 2% policy target but consistent with overall inflation during the year, according to Vanguard. With a reported uptick in inflation in recent months, the median inflation expectation rose by 0.2% at the end of 2024, meaning investors expect inflation to be 3.2% in 2025.

“Investors remain cautiously optimistic about the stock market and the economy heading into 2025. They are bullish on growth but bearish on inflation,” says Andy Reed, head of Investor Behavior Analysis at Vanguard.

Do investors believe the Fed will be able to bring inflation down to its 2% target by the end of 2025? Since June 2024, we have asked survey participants to estimate the likelihood of different inflation scenarios in the U.S. over the next 12 months. In the second half of 2024, investors increasingly believed that inflation would remain above the 2% target, with their probability assessment rising from 65% in August to 70% in December.

In December 2024, investors estimated a 15% probability that inflation would exceed 6% within 12 months, significantly higher than the 9% probability they had projected back in August. Similar to professional forecasts, including Vanguard’s economic and market outlook, uncertainty surrounding potential trade policies may be a key factor on many investors’ minds.

Duration, Corporate Bonds, and High Yield: The View of Active Fixed Income Managers

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Corporate bonds and high-yield strategies
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According to Alessandro Tentori, CIO for Europe at AXA Investment Managers, two factors will drive fixed income performance this year: “On one hand, a relatively contained duration management approach, with a defensive stance on U.S. bonds and a hint of optimism on European bonds; and on the other hand, a strategy inclined toward taking credit risks, including high yield, especially in the U.S. market, supported by both macroeconomic analysis and corporate balance sheets.”

At Neuberger Berman, they believe that after several years in which fixed income markets were primarily driven by central bank policies, this year attention will likely shift more toward fiscal actions: the policy and revenue decisions of the new Trump administration, as well as those of other governments that are redirecting their priorities or facing financial pressures.

“Since the arrival of COVID-19, investors have largely focused on central banks for clues about fixed income performance—from the implementation of zero-rate policies and financial liquidity provisions to sustain the global economy during the pandemic, to the adjustments made to counter rising inflation in 2021 and 2022, and the widely anticipated start of the current monetary easing cycle. With inflation continuing to decline, we are entering a period of gradual central bank rate cuts,” explains Neuberger Berman’s market outlook report.

Key Investment Ideas

Experts at Wellington Management see this as a moment to take advantage of bond market divergence. They acknowledge that caution will set the tone for 2025, a year in which sovereign bond yields could help investors offset potential interest rate volatility. “High levels of nominal growth worldwide provide a starting point that should cushion the impact of a potential global economic slowdown. At this moment, we do not foresee a recession or, consequently, an increase in rating downgrades and defaults. We also believe that high-yield securities currently offer adequate compensation for investors amid rising volatility. However, the exception to this rule is the long end of the yield curve, where longer-maturity bonds are struggling due to supply dynamics, inflation expectations, and higher nominal growth,” they explain.

Tentori also notes that in 2025, investors should not only consider the effects of duration, credit, and currency risk but also the trajectory of monetary policy. “This has been a key factor in fixed income portfolio construction, particularly during the period of Quantitative Easing. It could once again prove crucial to performance in the near future, especially amid policy divergence between the ECB and the Federal Reserve,” he says.

Aegon AM focuses on asset-backed securities (ABS), arguing that in an environment driven by sentiment and fundamentals, ABS should be favored. “Falling interest rates are positive from a fundamental perspective, though they may reduce the coupon of floating-rate products like ABS. However, growth and inflation expectations have undergone significant shifts over the past two years, as have interest rate outlooks in many markets. ABS investors are less affected by changes in interest rate expectations since the carry of these instruments depends primarily on the short end of the yield curve. As curves remain inverted, the current yield is about 80–90 basis points higher than the yield to maturity,” they argue.

A segment that Felipe Villarroel, partner and portfolio manager at Vontobel, finds particularly attractive for portfolios this year is corporate credit. “One of the main reasons we believe credit will continue to outperform sovereign debt in the medium term is corporate fundamentals. Everyone knows that corporate bond spreads are tight, and we expect some volatility over the next 12 months. However, if the macroeconomic outlook remains reasonable (i.e., no recession) and corporate finances stay strong, we see no clear reason to expect a significant increase in defaults,” Villarroel argues.

The Strength of High Yield

After high-yield bonds outperformed investment-grade bonds in 2024, managers seem to continue favoring them. According to Bloomberg data, higher-yielding assets—such as high-yield bonds, leveraged loans, and emerging market hard currency debt—outperformed investment-grade bonds for the fourth consecutive year. Specifically, U.S. cash high-yield bonds posted an 8.19% return, compared to 1.25% for investment-grade bonds.

In this regard, analysts at Loomis Sayles, an affiliate of Natixis IM, note that the fundamental outlook remains solid, supported by a positive earnings environment and a resilient U.S. economy. “Currently, the high-yield risk premium is at the narrowest end of its historical range, even considering the generally positive economic backdrop. The good news is that we anticipate relatively moderate credit losses this year, with defaults likely to stay around 3%. Overall, we believe high-yield bonds will remain an attractive place for carry, though investors should temper their total return expectations,” they argue.